Question

1- Under the theory of Modigliani & Miller without taxes, which of the following statements is false?

a) The capital structure is irrelevant.

b) The cost of equity is a linear function of the equity-to-debt ratio.

c) The value of the levered company is equal to the value of the unlevered company.

d) The cost of equity increases as the debt-to-equity ratio increases.

2 - Which of the following statements is true regarding the pecking order theory?

a) The external equity financing is considered as the last recourse.

b) It is a continuity of the static theory and assumes the optimal capital structure hypothesis.

c) There is no target debt-to-equity ratio.

3 - The financial risk refers to the risk related to :

a) The company's operations.

b) The company's bankruptcy.

c) The company's financial leverage

4 - Under the theory of Modigliani & Miller with taxes, the WACC of the levered company is less than that of the unlevered company, because :

a) The cost of equity is perpetually increasing.

b) There is a tax shield.

c) The financial leverage is detrimental for the company.

5- Under the theory of Modigliani & Miller with taxes and bankruptcy costs, which of the following statements is false?

a) As banckruptcy costs increase, the cost of capital increases.

b) As bankruptcy costs increase, the leverage becomes less optimal.

c) As bankruptcy costs increase, the cost of debt decreases.

Answer #1

1. Option b is correct . Cost of equity is not linear function
of equity to debt ratio. In fact it has a negative relation.

2. Option a is correct . Equity is first required to generated from
internal sources and external source is last.

3. Option c is correct. Higher the leverage higher is the financial
risk.

4. Option b is correct. There is a tax shiedl on interest
payments

5. Option c is correct. Higher is the bankruptcy cost higher is
the cost of debt

Which of the following statements is FALSE?
A. Franco Modigliani and Merton Miller argued that with perfect
capital markets, the total value of a firm should not depend on its
capital structure.
B. 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.
C. Leverage decreases the risk of the...

Which of the following statement is true regarding the
Modigliani and Miller (M&M) propositions (1958) in a perfect
financial market?
A) Capital structure is irrelevant because of the assumption
that investors and companies have differing tax rates.
B) It is assumed that the firm’s future cash flows remain fixed
under any circumstances.
C) The basic lesson of M&M propositions is that company’s
capital budgeting decisions are dependent upon the company's
capital structure decision.
D) The debt-to-equity ratio is an important...

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...

According to Modigliani and Miller (MM), in a world without
taxes, the optimal capital structure for a for-profit business
calls for approximately 100 percent debt financing.
True
False

Within the Modigliani Miller framework, under Scenario I (with
no frictional costs, no taxes, and no financial distress), consider
a firm with $40 million in cash flows, initially all equity
financed, and the cost of equity is 13%. If the firm takes on new
debt of $150 million, with a 9% interest rate, what is the new Re
or cost of equity for the firm?
Select one:
a. 13%
b. just over 16%
c. 18.4%
d. 26.5%
e. just under...

Which of the following statements is false
if capital markets have both taxes and financial distress as the
market imperfections?
A.
If two firms are identical but differ only in their capital
structure, then the value of the levered firm is higher than the
value of the unlevered firm by the present value of the interest
tax shield
B.
There is an optimal capital structure that can maximize firm
value
C.
The capital structure choice considers a trade-off between the
tax...

The basic point being made by Modigliani and Miller is that in
the absence of taxes and transaction costs
1. the optimal capital structure balances the firm’s tax-shield
and financial distress costs.
2. a firm cannot change the total value of its outstanding
securities by changing its capital structure
3. greater debt leads to a lower weighted-average cost of
capital and greater firm value.
4. we must account for the timing and risk of cash flows in
order to properly...

Discuss Modigliani and Miller's Propositions I and II in a
perfect world without taxes nor distress costs. List the basic
assumptions, results, and intuition of the model. Based on this
model, if the original unlevered firm value is $100 million and the
CFO is planning to carry out a leveraged recapitalization to a debt
equity ratio of 1:1. What’s the levered firm value? If the
unlevered equity requires 10% annual return and the debt requires a
6% of annual return,...

11. ____________ states that a firm borrows up to the point
where the benefit of the interest (or debt) tax shield from an
extra dollar of debt is just equal to the expense of the resulting
increase in bankruptcy costs.
A) The Modigliani and Miller (M&M) Proposition I without taxes
and without bankruptcy costs
B) The Modigliani and Miller (M&M) Proposition II without taxes
and without bankruptcy costs
C) The static theory (or trade-off theory) of capital
structure
D) The...

M&M Proposition I with no taxes implies that the:
Multiple Choice:
a. weighted average cost of capital decreases as the debt-equity
ratio increases.
b. cost of equity increases as the debt-equity ratio
decreases.
c. value of an unlevered company equals the value of a levered
company plus the value of the interest tax shield.
d. cost of capital is the same regardless of the debt-equity
ratio used
e. value of a company is inversely related to the amount of
leverage...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 15 minutes ago

asked 15 minutes ago

asked 31 minutes ago

asked 38 minutes ago

asked 39 minutes ago

asked 43 minutes ago

asked 44 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago