Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not...
Which of the following statements is false in a
Modigliani-Miller world?
A. Capital structure does not affect the cost of capital
B. Higher leverage increase the cost of equity
C. Higher leverage does not affect the WACC
D. Higher leverage does not affect the cost of equity
Which of the following is not an advantage of having large shareholders?
A. Better coordination in monitoring management
B. Executives more likely to be dismissed when underperforming
C. Less shareholders' interference in the management of the firm
D. Less free riding among shareholders
What observe negative stock price reactions to Greenmail deals. Why does not this happen?
A. Because these deals indicate that the company may issue equity in the future, thus diluting the value of existing shares
B.Because these deals generate an adverse selection problem, as the company pays to buy back shares whose value is unknown
C.Because both the inflated price paid by the company to buy back its shares and the reduced likelihood of a takeover hurt the shareholders
D.Because it is pointless for the company to buy back its own shares
Company X has a debt to equity ratio equal to one, its cost of equity is 20% and its cost of debt is 10%. Assuming a tax rate of 50%, X's weighted average cost of capital is
A.25%
B.12.5%
C.16.5%
D. 5%
Companies A and B are identical except for their capital structure A is 100% equity financed while B has debt to equity ratio equal to one. Assuming risk free rate debt and that company A has a beta equal to one. What would be the beta of company B's equity?
A.0.5 B.1 C.1.5 D.2
Homework Answers
1.Which of the following statements is false in a Modigliani-Miller world?
D. Higher leverage does not affect the cost of equity
2.Which of the following is not an advantage of having large shareholders?
B. Executives more likely to be dismissed when underperforming
3.What observe negative stock price reactions to Greenmail deals. Why does not this happen?
D.Because it is pointless for the company to buy back its own shares
4.Company X has a debt to equity ratio equal to one, its cost of equity is 20% and its cost of debt is 10%. Assuming a tax rate of 50%, X's weighted average cost of capital is
B.12.5%= 20*50% +10*(1-.5)* 50%
=10+2.5 = 12.5%
5.Companies A and B are identical except for their capital structure A is 100% equity financed while B has debt to equity ratio equal to one. Assuming risk free rate debt and that company A has a beta equal to one. What would be the beta of company B's equity
B.1
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