Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. A. Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.)
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EXERCISE 1
Indicate whether each of the following statements is true or false. Support your answers
with the relevant explanations.
A. Modigliani and Miller’s Proposition II assumes that increased borrowing does
not affect the interest rate on the firm’s debt. (Explain your reasoning.)
Step by step
Solved in 2 steps
- Question 24 Which of the following is an advantage of debt over equity A It's generally cheaper B Repayments are generally flexible C Assets can be given as security on debt D The bank can help in the day to day running of the businessQuestion 3 Company X has issued fixed-rate debt and wishes to "unlock" its interest rate exposure as it believes variable rates may decline. The company enters into an interest rate swap whereby it agrees to receive a fixed rate of interest, and pay a variable rate referenced to LIBOR and based on a notional amount that corresponds to the principal amount of the debt. Which of the folllowing statement is false.? the company may be impacting by reference rate reform and therefore should consider the implications of ASC 848 the transaction the company is contemplating may qualify as a fair value hedge in order to achieve hedge accounting, the company will need to address a number of hedge accounting requirements, including documenting its objectives, the method of testing effectiveness among other matters. interest rate risk is not an eligible risk for hedge accounting purposes since it is clearly and closely related to the economic…5.What is the major drawback of debt financing? Select one: You have to pay back the money Increasing debt changes the gearing ratio of the firm Interest payments must be made before shareholder dividends and irrespective of fluctuations in profits Lenders often require security of the loan against assets of the company
- 18. Which of the following statements are true?Statement I. An interest rate reflects the rate of return that a creditor receives when lending money, or the rate that a borrower pays when borrowing money. Interest rates change over time, so does the rate earned by creditors who provide loans or the rate paid by borrowers who obtain loans. Statement II. Interest rate movements have a direct influence on the market values of debt securities, such as money market securities, bonds, and mortgages. Statement III. Interest rate movements have an indirect influence on equity security values because they can affect the return by investors who invest in equity securities. Statement IV. Since interest rates have an influence on securities, participants in financial markets attempt to anticipate interest rate movements when restructuring their investment or loan positions. a. I,II,III b. I,II,IV c. I,III,IV d. I,II,III,IVIndicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) b) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) c) The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.)Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) 3. The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.) 4. The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.) 5.In the presence of corporate taxes, a company would prefer to raise…
- QUESTION 3 Which of the following actions cannot be used by banks to increase reserves? A. Buy Treasury debt B. Sell loans C. Call loans D. Sell Treasury debt17.Which of the following statements is/are true?Statement I. Generally, the tenor of the investment also defines the riskiness of the repayment of debt.Statement II. The longer the life of the debt, the riskier the repayment. Hence, the interest rate is lower.Statement III. The term tenor describes the length of time remaining in the life of a financial contract. a. II only b. III only c. I and III d. II and III1. Explain the difference between debt to income (DTI) ratio and loan to value ratio (LTV). In addition, mention in which scenario the mortgage is likely to be insured, (a) High or low DTI ( b). High or low LTV. 2. Expound on the arguments in favour and against financial innovation. Provide examples of financial innovation within any country of choice
- 11.Explain why a firm needs to understand their allocation of debtfinancing to equity (the amount the owner used to fund thebusiness). Discuss how this allocation can impact their Total DebtRatio. Can having too much debt bring down profit margins? Why orWhy Not?Question 2: What Would Your Finance Manager Say?Ike Intern stated, “Our firm should always issue bonds when the market rate of interest is greater than the stated rate of interest. By doing so, we would make lower periodic cash payments for interest.” Irene Intern countered, “You’re wrong. We should issue bonds only when the market rate of interest is less than the stated rate of interest. If we did, we could sell bonds at a premium and receive more cash.” What would Ike and Irene’s Finance Manager say? Question 3: Theory Vs. PracticeAs discussed in the chapter, preferred stock offers an investor certain preferences over common stock in relation to dividends and liquidation value. In theory, these preferences should make preferred shares more attractive to potential investors than common stock. In practice, however, a majority of companies do not issue preferred stock, and most investors seem to favor putting their investment dollars into common shares. Discuss some of the reasons a…Indicate whether each of the following statements is true or false. Support vour answers with relevant explanations.A) Modigliani and Miller's Proposition II assumes that increased borrowin does not afffect the interest rate on the firm's debt.B) Under the conditions of perfect capital markets the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. C) The higher the systematic risk of a company's stock, the higher the value of its beta. The higher the beta, the higher the return required by investors.
