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- Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mixTrade off Theory states that Firms should use equal debt and equity in capital structure Firms with higher operating risk should use less debt Firm add leverage when interest rates are low None of the above Firm should use more debt to overcome high par values of stockWhich of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
- Is the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?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.Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not? You need to support your answers with examples.
- Which of the following statements regarding the capital structure is CORRECT? Group of answer choices: According to the M&M theory under perfect market assumptions, the value of a firm with no debt is the same as that with 100% debt. A firm's optimal capital structure is one that maximizes both its expected EPS and stock price. The pecking order model predicts that the equity financing is more preferred to debt financing. According to the M&M theory, if only corporate taxes are considered, the optimal capital structure is one with 0% debt financing. According to the static tradeoff model, a firm's optimal capital structure can be obtained by considering the debt-related costs only.If the financial market is frictionless, the cost of equity is higher than the cost of debt in all firms. Therefore, in this circumstance, firms must finance their projects by issuing debt rather than equity. Is it right?Explain briefly how WACC is related to the level of leverage (debt/equity ratio) of a firm. What are the key differences between the main capital structure theories?
- Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because a. as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will increase b. it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets c. returns below the cost of capital will cover all the fixed costs associated with capital and provide excess returns to the firm's stockholdersWhich is true when evaluating two (2) companies operating in the same industry? Since they may have different betas, they should have the different risk-free rates. They should have the same beta. Regardless of capital structure, they should have the same risk-free rate in computing for cost of common equity. They should have the same cost of capital.Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity?
