Capital structure is irrelevant if: I) capital markets are efficient; II) each investor can borrow/lend on the same terms as the firm; III) there are no tax benefits to debt Multiple Choice A) III only B) I only C) II only D) I, II, and III
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Capital structure is irrelevant if:
- I) capital
markets are efficient ; - II) each investor can borrow/lend on the same terms as the firm;
- III) there are no tax benefits to debt
A) III only
B) I only
C) II only
D) I, II, and III
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- Which of the following statements is correct? a. As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure does matter, then it must stem from a market imperfection. b. Because corporations pay taxes on their profits after interest payments are deducted, interest expenses increase the amount of corporate tax firms must pay. c. To determine the loss due the leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive minus the stream of future dividends. d. By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes increases. e. In general, the gain to lenders from the tax deductibility of interest payments is referred to as the interest tax benefit.Why is it important to include the tax effect into cost of capital computations for firms with debt financing? Multiple Choice taxable income is reduced by the amount of the interest expense. taxes are paid on interest but not on dividends. firms pay taxes on the outstanding principal amount of the debt. comparisons with equity financing would otherwise not be possible.Which of these is a main characteristic of debt capital?(a) Investors in debt participate in the ownership of the firm.(b) Investors in debt are paid interest.(c) Debt is more risky for the investor and less risky for the firm.(d) If dividends are not paid, this can lead to foreclosure, legal proceeding and financial distress.
- According to Modigliani and Miller Proposition II: A. WACC curve is flat and hence no optimal capital structure exists B. WACC curve is upward slopping , indicating the equity financing exclusively being the optimal capital structure of a company C. WACC curve is downward slopping, hence the perfect capital structure is 100% debt D. An optimal capital structure exists as it is the balance between the tax benefit and the bankruptcy costsThe MM irrelevance capital structure theory proved that a firm’s value is unaffected by its capital structure.But their study was based on all of the following strong assumptions excluding: a. There are no brokerage costs. b. There are no corporate taxes and personal taxes. c. There are bankruptcy costs and agency costs. d. There is no asymmetric information problem, and all investors can borrow at the same rate as corporations.Are there firms not subject to the capital market constraint? What types of firms/organizations are these? Can large corporations not be tied to capital markets? Don't answer by pen paper plz
- Under Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occursWhen one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is: Multiple Choice A) capitalized by the levered cost of equity. B) not accounted for by the use of the WACC. C) automatically considered because the after-tax cost of debt is included within the WACC formula. D) considered by deducting the interest payment from the cash flows.Which of the following is not an assumption made by Modigliani and Miller in relation to the independence hypothesis concerning capital structure?a. No taxesb. There are no bankruptcy costsc. Equal borrowing rates for individual and businessesd. There is imperfect informatione. All of the above are assumptions made by Modigliani and Miller under the independence hypothesis
- The following are the assumptions of the Modigliani and Miller approach, EXCEPT A. Investors think logicallyB. Dividends are fully declaredC. Capital Markets are PerfectD. No corporate taxes existIt has been suggested that in a world with only corporate taxation the value of the firm = the value of all equity financed + the present value of tax shield on debt finance Discuss how and why the existence of personal taxation might alter the choice of capitalstructure suggested in part (a) aboveWhich of the following is not a capital market instrument? a. Corporate stock b. Mortgages c. Corporate bonds d. Repurchase agreement