Question

Which of the following statements may NOT be TRUE? Select one:

a. It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.

b. Under current market condition, Modigliani and Miller argued that the total value of a firm should not depend on its capital structure.

c. Leverage increases the risk of the equity of a firm.

d. Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project.

Answer 1

Ans b. Under current market condition, Modigliani and Miller argued that the total value of a firm should not depend on its capital structure.

True statements are: Leverage increases the risk of the equity of a firm, Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of One Price the combined values of debt and equity must be equal to the cash flows of the project, It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity.