Question

Which of the following statements applies to the so-called in a frictionless world suggested by Modigliani & Miller?

Select one:
a. Repurchases of treasury shares have no effect on the value of the company.
b. In principle, a company should not distribute funds out to its owners.
c. The dividend payment lowers the market price of the share.
d. Selling shares in the market is not a tax-efficient way to turn your shareholding into cash.

According to the Capital Asset Pricing model, an investment with a beta factor of zero has no systematic risk. If the CAPM applies, which of the following applies to such an investment?

Select one:

a. Its expected return is equal to the risk-free interest rate.

b. Its return volatility is zero.

c. Its expected return is equal to the risk-free interest rate plus the market risk premium.

d. It cannot be located on the Security Market Line.

Thanks!

Answer 1

1. According to Modigliani Miller approach, the company should not be distributing funds to its owners because distribution of dividend or through buyback is irrelevance as it will not lead to an increase in share price.

Correct answer is option( B)

Rest of the options are stating otherwise and are not correct.

2. When the beta of a company is zero, it means that the market premium will be zero, and the risk free rate of return will always be equal to expected rate of return.

Correct answer would be option (A)

All the other statement are stating otherwise are not correct.