9.Which of the following are true according to the Modigliani and Miller propositions? i.In a world without taxes, all else equal, the value of a firm with a low debt-to-equity ratio is higher than the value of a firm with a high debt-to-equity ratio. ii.In a world without taxes, a firm's cost of equity capital increases as the firm takes on more debt. iii.In a world with taxes, firm value is maximized when the firm has a low debt-to-equity ratio. iv.In a world with taxes, a firm's cost of equity capital increases as the firm takes on more debt. a.ii, iii, and iv, but not i b.i, iii, and iv, but not ii c.ii and iv, but not i or iii d.i, ii, and iii, but not iv

9.Which of the following are true according to the Modigliani and Miller propositions? i.In a world without taxes, all else equal, the value of a firm with a low debt-to-equity ratio is higher than the value of a firm with a high debt-to-equity ratio. ii.In a world without taxes, a firm's cost of equity capital increases as the firm takes on more debt. iii.In a world with taxes, firm value is maximized when the firm has a low debt-to-equity ratio. iv.In a world with taxes, a firm's cost of equity capital increases as the firm takes on more debt. a.ii, iii, and iv, but not i b.i, iii, and iv, but not ii c.ii and iv, but not i or iii d.i, ii, and iii, but not iv

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 6QE

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For each statement indicate whether it is true or false and briefly explain why. a) In a perfect capital market with no corporate taxes, as a firm takes on more and more debt its weighted average cost of capital remains unchanged while its required return on equity rises. b) If a firm issues riskfree debt the risk of the firm’s equity will not change. So, riskfree debt allows the firm to get the benefit of a low cost of debt without raising its cost of equity. c) In the context of firms’ capital structure decisions, the theory predicts that the value of a firm’s equity will rise in direct proportion to the level of debt in its capital structure.
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Hi Expert,I got this theoretical question in Corporate Finance, and i was hoping for a bit of help :) Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. Best,Christian
WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.
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