Homework Answers
Q1. According to MM Proposition I, with perfect capital markets the value of a firm is independent of its capital structure. The answer is false since capital structure does not affect the value of the firm.
Q2. Under the assumptions of Modigliani and Miller approach, the value of the firm is not affected by the choice of capital structure but it is affected by the operating income of the firm . Hence, the answer is yes.
Q3. As long as Weighted Average Cost of Capital does not change , and also the cash flows generated genrated by it's assets does not change, the capital structure will not change the total value of the firm. The answer of this question is true, the capital structure will not change the total value of the firm.
Q4. Leverage increases the risk of the equity of the firm hence, it is not correct to discount the cash flows of a levered firm with the cost of equity of an levered firm. The risk of the equity increases the risk and should be reflected in the peercentage return. Hence, the answer is option is C.
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Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal...
17. Your boss would like you to explain something useful you learned from your studies. You...
17. Your boss would like you to explain something useful you learned from your studies. You explain that M&M Proposition I argues that in a world with taxes: A. the capital structure of a firm does not matter because investors can use homemade leverage. B. the value of a firm increases as the firm's debt increases because of the interest tax shield. C. the optimal capital structure is the one that is totally financed with equity. D. the cost of...
please answer both QUESTION 11 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes,...
please answer both
QUESTION 11 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes, no costs of financial distress, no asymmetric information between investors and corporate executives, etc. When those assumptions we relaxed so that they are more consistent with the real world there are corporate taxes and interest payments are tax deductible) and there are costs of financial distress - then which of the following is true? Each firm has an optimal capital structure where firm value...
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent...
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent of its capital structure and is equal to its equity cost of capital if the firm is unleveraged. II. Given a 35% corporate tax rate, for every £1 in new permanent debt that the firm issues, the value of the firm increases by £0.35. III. A key assumption of MM's Proposition I without taxes is that individuals can borrow on their own account at...
The trade-off theory relies on the threat of financial distress. But why should a public corporation...
The trade-off theory relies on the threat of financial distress.
But why should a public corporation ever have to land in financial
distress? According to the theory, the firm should operate at the
top of the curve in Figure 1. Of course, market movements or
business setbacks could bump it up to a higher debt ratio and put
it on the declining, right-hand side of the curve. But in that
case, why doesn't the firm just issue equity, retire debt,...
QUESTION 22 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes, no costs of...
QUESTION 22 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes, no costs of financial distress, no symmetrie information between investors and corporate executives, te. When the assumptions are relaxed so that they are more consistent with the real world there are corpore taxes and interest payments are tax deductible) and there we costs of financial distresses which of the following is true? Each firm has an optimal capital structure where WACC is maximized Each firm has an...
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F....
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio Ratio Ratio (wa) (ws) (D/S) Before-...
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F....
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio Ratio Ratio (wa) (ws) (D/S) Before-...
please show in Excel Boom Mechanics is trying to determine its optimal capital structure, which now...
please show in Excel
Boom Mechanics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not Currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment Dankers. On the basis of those discussions, the staff has created the following table showing the firm's debt cost at different debt levels: Debt-to-Equity-to Debt-to- Capital Capital...
Problem 16-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital...
Problem 16-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio (wa) Ratio (w) Ratio (D/S)...
Problem 15-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure....
Problem 15-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax...
please answer both
QUESTION 11 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes, no costs of financial distress, no asymmetric information between investors and corporate executives, etc. When those assumptions we relaxed so that they are more consistent with the real world there are corporate taxes and interest payments are tax deductible) and there are costs of financial distress - then which of the following is true? Each firm has an optimal capital structure where firm value...
The trade-off theory relies on the threat of financial distress.
But why should a public corporation ever have to land in financial
distress? According to the theory, the firm should operate at the
top of the curve in Figure 1. Of course, market movements or
business setbacks could bump it up to a higher debt ratio and put
it on the declining, right-hand side of the curve. But in that
case, why doesn't the firm just issue equity, retire debt,...
QUESTION 22 Modigliani and Miller's Irrelevance Hypothesis assumes that there are no taxes, no costs of financial distress, no symmetrie information between investors and corporate executives, te. When the assumptions are relaxed so that they are more consistent with the real world there are corpore taxes and interest payments are tax deductible) and there we costs of financial distresses which of the following is true? Each firm has an optimal capital structure where WACC is maximized Each firm has an...
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio Ratio Ratio (wa) (ws) (D/S) Before-...
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio Ratio Ratio (wa) (ws) (D/S) Before-...
please show in Excel
Boom Mechanics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not Currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment Dankers. On the basis of those discussions, the staff has created the following table showing the firm's debt cost at different debt levels: Debt-to-Equity-to Debt-to- Capital Capital...
Problem 16-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio (wa) Ratio (w) Ratio (D/S)...
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