Question

According to Modigliani and Miller (MM)'s basic theory of capital structure, which of the following is considered when determining the value of a firm?

A.Tax deductible interest

B.Personal income taxes

C. Brokerage costs

D.Bankruptcy costs

E. Retained earning

The cost of debt to the firm is adjusted for _____.

A.marginal revenue generated

B. taxes

C. interest rate

D. internal rate of return

E. return to investors

A_____ is an action taken by a firm to decrease the per-share price of its stock.

A.stock appreciation

B.stock split

C.stock issue

D.stock repurchase

E. stock redemption

Which of the following is an advantage of stock repurchases?

A.Stock repurchases signal that the stock is overpriced.     

B. Companies cannot distribute excess cash through stock repurchases.

C. Stock repurchases are generally irregular in nature.

D.

Stock repurchases provide protection against a takeover attempt.

E. Stock repurchases make it difficult to exercise employee options

Answer 1

1) Tax Deductible Interest.

Usually companies also consider tax sheilds i.e tax saved by the presenese of interest in the valuation

2) Taxes

Since there is a tax sheild due to the interest that the company is paying on its debt, debt is always adjusted for tax

3) Stock split

Stock split will not change the valuation of the company, but number of shares increase and per share price decrease

4) Stock repurchases provide protection against a takeover attempt

When some on is thinking of taking over a company, they may try to buy stocks to get atleast 51% ownership in the company. Stock repurchase will leave no stocks for them to buy