The proposition that the value of the firm would increase when the firm have a higher...
- The proposition that the value of the firm would increase when the firm have a higher financial leverage (higher debt to equity ratio) is called:
- the capital asset pricing model.
- MM Proposition I (no taxes).
- MM Proposition I (with taxes).
- the law of one price.
Homework Answers
The answer is C. MM Proposition I (with taxes)
If we allow for taxes in proposition I, the firm can increase its value by financing with debt. This is because debt allows the firm to pay less in taxes.
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The proposition that the value of the firm would increase when
the firm have a higher...
Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm...
Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm value), with taxes? a)Firm value increase with firm leverage when debt ratio is low, and then decrease with firm leverage when debt ratio is too high b)The value of a firm unlevered is greater than the value levered c)There could be an arbitrage opportunity when two firms that are virtually identical except for their capital structure are selling in the market at different values....
Which of these statements apply MM Proposition II without taxes? I. The expected return on equity...
Which of these statements apply MM Proposition II without taxes? I. The expected return on equity is positively related to leverage. II. The value of a firm cannot be changed by changing its capital structure. III. Risk to equity holders increases with leverage. IV. The expected return on equity is affected by the firm's debt-to-equity ratio. Multiple Choice II and IV only I, II, and III only I, III, and IV only I and III only I, II, III, and...
1. According to M&M Proposition II without taxes, a firm's cost of equity is a function...
1. According to M&M Proposition II without taxes, a firm's cost of equity is a function of the required rate of return on the firm's assets, the firm's debt/equity ratio, and the firm's cost of debt. True or False 2. When EBIT is positive, high leverage decreases the returns to shareholders (as measured by ROE). true or false 3. All else the same, taxes and bankruptcy claims on the cash flows of the firm will tend to increase with decreases...
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care...
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care about the firm's debt policy. b. Firm value is unaffected by the firm's capital structure. c. After a change in capital structure, the firm's value should be the same as it was prior to the chance in capital structure. d. The proposition is also called the debt-irrelevance proposition. 29. Regarding MM 1958 proposition, a firm's value is not influenced by a. interest rate paid...
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...
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...
Which of the following multiple choices are correct for the following 2 questions: A key underlying...
Which of the following multiple choices are correct for the following 2 questions: A key underlying assumption of MM Proposition I without taxes is that: 1. financial leverage increases risk. 2. individuals and corporations borrow at the same rate. 3. corporations are all-equity financed. 4. individuals can borrow at lower rates than corporations MM Proposition I without taxes proposes that: 1. the value of an unlevered firm exceeds that of a levered firm. 2. the value of a levered firm...
your friend makes the following argument: if there are no transaction costs, taxes or information asymmetry, as we increase the leverage of the firm, the risk of equity will increase. Consequently, stock holders will require a higher rate of return. the f
your friend makes the following argument: if there are no transaction costs, taxes or information asymmetry, as we increase the leverage of the firm, the risk of equity will increase. Consequently, stock holders will require a higher rate of return. the firm's debt will also become riskier and so bondholders will require a higher rate of return. Hence the firm's weighted average cost of capital will increase. is his statement true or false?
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...
Multiple Choice There is no condition known to date whereby a corporation can increase firm value...
Multiple Choice There is no condition known to date whereby a corporation can increase firm value through the use of leverage. o Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets. o O If individual's pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing. o Margin accounts tend to be high interest rate sources of funds for individuals. o o Corporations can...
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...
Multiple Choice There is no condition known to date whereby a corporation can increase firm value through the use of leverage. o Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets. o O If individual's pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing. o Margin accounts tend to be high interest rate sources of funds for individuals. o o Corporations can...
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