The empirical evidence concerning financing decisions made by firms supports the idea that financing decisions are made randomly by firms with no real impact on firm value. In no more than 6 lines, comment on this statement.
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The empirical evidence concerning financing decisions made by firms supports the idea that financing decisions are made randomly by firms with no real impact on firm value.
In no more than 6 lines, comment on this statement.
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- Modigliani and Miller suggest that, under certain assumptions, financing decisions do not matter in that they do not affect the value of the firm. They define when these assumptions hold as perfect markets. Which of the following are assumptions that they claim must hold for financing decisions to be irrelevant? Group of answer choices There are no taxes There are no transaction costs The firm has a fixed investment policy The sun must rise in the North and set in the SouthChoose the correct. Which of the following is not included in the assumption on which Myron Gorden proposed a model on Stock valuation: A. Retained earning the only source of financing B. Finite Life of the firm C. Taxes do not exist D. Constant rate of return on firms investment.Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced. Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.
- Which one of the following statements is correct if the pecking order theory holds?a. Firms with the highest debt ratios can be expected to have the lowest profits owing to the lesser availability of internal financeb. Firms will be keen to undertake equity issues as this signals to investors that managers believe the firm is undervaluedc. Firms will raise funds via equity issues in preference to debt issuesd. Firms will raise funds via external finance in preference to internal financee. None of the aboveGiven asymmetric information between investors and managers, )How would investors interpret firm’s decision to finance through debt? )How would investors interpret firm’s decision to finance through equity? )How would investors interpret firm’s decision to buy back its equity? )Given the signaling theory above, what is the implication on firm’s financing preference (hint: pecking order hypothesis)?Which of the following statements is FALSE? A. Equity cost of capital is normally higher then cost of debt, thus cost of debt can be examined in isolation. B. No matter if a firm is unlevered or levered, there is no difference in the market value of the firms total securities and market value of the firm’s assets. C. Introducing debt increases the risk even though it may be cheap and consequently increases firms equity cost of capital. D. Cost of Capital of equity and Leverage can be explicitly explained by first proposition that Modigliani and Miller introduced.
- The 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.The efficient market hypothesis says that Multiple Choice market prices reflect underlying asset values. individual investors should not participate in the financial markets. investors should expect to earn abnormal profits. financial managers can accurately time stock and bond sales. creative accounting can be used to inflate stock prices.Which of the following is incorrect about the Pecking Order Theory? A.Firms with high ratios of fixed assets to total assets tend to have higher debt ratios.This evidence exclusively supports the pecking order theory B.When external finance is required,firms issue debt first and equity as a last resort C.Most profitable firms borrow less not because they have lower target debt ratios but beause they don't need external finance D.Firms prefer internal finance since funds can be raised without sending adverse signals
- If the firm is large scale, it manages the financial requirements with the help of Select one a Internal Sources b None of the options c. External Finance d. Both Internal and ExternalA common problem facing any business entity is the debt versus equity decision. When funds are required toobtain assets, should debt or equity financing be used? This decision also is faced when a company is initiallyformed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt arevery different from those of equity as are the financial implications of using one method of financing as opposedto the other.Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products.Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 toacquire the initial assets of the company. They have narrowed down the financing mix alternatives to two:1. All equity financing2. $20,000,000 in debt financing and $30,000,000 in equity financingNo matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annualreturn, before…How many statements below are correct about the Modigliani-Miller theorem? i. The theorem is not an exact description of reality. ii. The theorem provides a benchmark to understand how the capital structure could affect WACC. iii. The theorem implies that firms have benefited from financing with debt due to a higher required rate of return on debt compared with equity. iv. The value of the firm is not affected by its capital structure under any assumptions.