Homework Answers
Option 1 is right
As per M&M Proposition 1 the value of a company is independent of its capital structure. This means the value of an all equity firm is the same as value of an all debt firm. Hence if the equity holders borrow money using debt the value oft he company does not change since the borrowing cost is very low.
All other options hence are incorrect since the M&M Proposition holds true.
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Q32. Equity investors can borrow money to purchase a firm's stock. Assume that the borrowing interest...
John invested in North Point stock when the firm was unlevered. After that, North Point has...
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North...
Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized...
Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized at 100% Signaling theory implies that a firm with extremely favorable prospects will be more likely to issue to fund any new projects. When a firm announces a new stock offering, the price of its stock will usually . When information is , managers have more information about a firm's prospects than investors do. Blue Ram Brewing Company currently has no debt in its...
Question No: 1 The overall (weighted average) cost of capital is composed of a weighted average of : a)The cost of common equity and the cost of debt b)The cost of common equity and the cost of preferred stock c)The cost of preferred stock and the cost o
Question No: 1The overall (weighted average) cost of capital is composed of a weighted average of :a)The cost of common equity and the cost of debtb)The cost of common equity and the cost of preferred stockc)The cost of preferred stock and the cost of debtd)The cost of common equity, the cost of preferred stock, and the cost of debtQuestion No: 2Which of the following is a characteristic of preferred stock?a)These stocks have not stated liquidating valueb)Dividends on these stocks can...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash $221,260 Accounts payable $255,300 Receivables 629,740 Other current liabilities 187,220 Inventories 476,560 Notes payable to bank 170,200 Total current assets $1,327,560 Total current liabilities $612,720 Long-term...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 89,540 Accounts payable Receivables 219,780 Other current liabilities Inventories 203,500 Notes payable to bank Total current assets $512,820 Total current liabilities Long-term debt Net fixed...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 87,615 Accounts payable $ 87,615 Receivables 302,670 Other current liabilities 111,510 Inventories 215,055 Notes payable to bank 55,755 Total current assets $605,340 Total current liabilities...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 131,250 Accounts payable Receivables 253,125 Other current liabilities Inventories 196,875 Notes payable to bank Total current assets $581,250 Total current liabilities Long-term debt Net fixed...
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM)...
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM)...
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
Data for Barry Computer Co, and its industry averages follow. The firm's debt is priced at par,...
Data for Barry Computer Co, and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash Accounts payable $82,225 Receivables $56,925 202,400 164,450 Other current liabilities 101,200 Inventories Notes payable to bank 44,275 Total current assets $423,775 Total current liabilities $227,700 $132,825...
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North...
Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized at 100% Signaling theory implies that a firm with extremely favorable prospects will be more likely to issue to fund any new projects. When a firm announces a new stock offering, the price of its stock will usually . When information is , managers have more information about a firm's prospects than investors do. Blue Ram Brewing Company currently has no debt in its...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash $221,260 Accounts payable $255,300 Receivables 629,740 Other current liabilities 187,220 Inventories 476,560 Notes payable to bank 170,200 Total current assets $1,327,560 Total current liabilities $612,720 Long-term...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 89,540 Accounts payable Receivables 219,780 Other current liabilities Inventories 203,500 Notes payable to bank Total current assets $512,820 Total current liabilities Long-term debt Net fixed...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 87,615 Accounts payable $ 87,615 Receivables 302,670 Other current liabilities 111,510 Inventories 215,055 Notes payable to bank 55,755 Total current assets $605,340 Total current liabilities...
Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 131,250 Accounts payable Receivables 253,125 Other current liabilities Inventories 196,875 Notes payable to bank Total current assets $581,250 Total current liabilities Long-term debt Net fixed...
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
Data for Barry Computer Co, and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash Accounts payable $82,225 Receivables $56,925 202,400 164,450 Other current liabilities 101,200 Inventories Notes payable to bank 44,275 Total current assets $423,775 Total current liabilities $227,700 $132,825...
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