Question

Your co-worker states, “There is no benefit to issuing debt.” Assuming the Modigliani and Miller assumptions...

Your co-worker states, “There is no benefit to issuing debt.” Assuming the Modigliani and Miller assumptions are true, is your co-worker’s claim:

True, because firm value is unaffected by debt.
True, because debt might lead to bankruptcy.
False, because debt increases the return to equity.
False, because holding debt provides interest tax shields
0 0
Add a comment Improve this question Transcribed image text
Answer #1

The answer is True, because the firm value is unaffected by debt

One of the assumptions of the Modigliani and MIller is that there are no taxes.

When there are no taxes, there is no interest tax shield, so there is no benefit to issuing debt.

Can you please upvote? Thank You :-)

Add a comment
Know the answer?
Add Answer to:
Your co-worker states, “There is no benefit to issuing debt.” Assuming the Modigliani and Miller assumptions...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Modigliani and Miller Propositions: True or False and explain your answer; 1. MM's propositions assume perfect...

    Modigliani and Miller Propositions: True or False and explain your answer; 1. MM's propositions assume perfect financial markets, with no distorting taxes or other imperfections. 2. MM's proposition 2 assumes that increased borrowing does not affect the interest rate on the firm's debt. 3. Borrowing does not increase financial risk and the cost of equity if there is no risk of bankruptcy. 4. Borrowing increases firm value if there is a clientele of investors with a reason to prefer debt.

  • 8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic...

    8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms with a higher proportion of...

  • Modigliani & Miller show that dividend policy can also be considered irrelevant. Yet, unexpected increases in...

    Modigliani & Miller show that dividend policy can also be considered irrelevant. Yet, unexpected increases in dividends are often closely followed by price increases, why? To clarify, when a firm pays a dividend the stock price should drop by the amount of the dividend on the ex-dividend date. Let's say a firm has 5 stockholders, each holding 1 share. The firm owns $2,000 in cash and $3,000 in other assets. So the firm is worth $5,000 (it owes no debt)....

  • 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....

  • Respecfully--Please answer all if you are willing to help. This is over MM propositions anf optimal...

    Respecfully--Please answer all if you are willing to help. This is over MM propositions anf optimal capital structure theories QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...

  • Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes...

    Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists. As an analyst, you are tracking the financial performance of St. Margaret's Beer Co. (SMB)...

  • True or False? 1) PepsiCo has a higher debt ratio than Chevron (use the latest financial...

    True or False? 1) PepsiCo has a higher debt ratio than Chevron (use the latest financial statements on Yahoo). 2) Apple has a higher profit margin than Gilead Science (use the latest financial statements on Yahoo). 3) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments, a bankruptcy case cannot begin until the firm defaults on a scheduled payment. 4) When a firm increases its common stock dividend, it must...

  • Paragraph One- Introduce your primary source "Chapter" (Economics of Public Issues, Miller et.al, 2014) claims....introduce the...

    Paragraph One- Introduce your primary source "Chapter" (Economics of Public Issues, Miller et.al, 2014) claims....introduce the main point of the chapter and explain: Why should we care? How will this topic, issue, problem affect us? Or more to the point, who will benefit from knowing more about this issue, situation, problem. Why is this an important topic, issue, or problem? Paragraph Two Introduce the main points of your research. Make sure you give credit to at least two other sources....

  • Hi, I am requesting your help. Some of those that I am not sure if I...

    Hi, I am requesting your help. Some of those that I am not sure if I am right? Thank you, Michelle ________________________________ You work at Ford Motor Company and are responsible for determining weekly production capacity for the Juarez, Mexico assembly plant. There are 21 days left in the production month. Your sales manager just informed you that 4,725 vehicles need to be produced in the upcoming days to meet projected sales demand in the United States 21. Your production...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT