Which of the following is NOT the assumptions of Modigliani and Miller without tax theory? A. Investors have different expectations on returns and risks. B. There are no taxes, transaction costs, or issuance costs associated with security trading. C. A firm's financing decisions neither change the cash flows generated by its investments, nor do they reveal new information about them. D. Investors and firms can trade the same set of securities at competitive market prices equal to the present value (PV) of their future cash flows.
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14. Which of the following is NOT the assumptions of Modigliani and Miller without tax theory?
| A. |
Investors have different expectations on returns and risks. |
|
| B. |
There are no taxes, transaction costs, or issuance costs associated with security trading. |
|
| C. |
A firm's financing decisions neither change the cash flows generated by its investments, nor do they reveal new information about them. |
|
| D. |
Investors and firms can trade the same set of securities at competitive market prices equal to the present value (PV) of their future cash flows. |
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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.1)How does a profitable capital market help reduce the prices of goods and services? 2) The SEC attempts to protect investors who purchase newly issued securities by requiring issuers to provide relevant financial information to potential investors. The SEC does not provide an opinion on the actual value of the securities.Therefore, a reckless investor could pay too much for some shares and consequently lose a lot. Do you think the SEC should, as part of every new offering of stocks or bonds, give investors an opinion on the appropriate value of the securities being offered? Explain.Which one of the following is NOT an implication of market efficiency for corporate finance? Group of answer choices Firms cannot successfully time issues of debt and equity Firms can successfully time issues of debt and equity Managers cannot fool the market through creative accounting Managers cannot profitably speculate in foreign currencies and other instruments Managers can reap many benefits by paying attention to market prices Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate taxes? Group of answer choices individuals and corporations borrow at the same rate There are no transaction or bankruptcy costs Corporations are taxed at the rate TC on earnings after interest There are no taxes The cost of equity rises with leverage because the risk to equity rises with leverage _______ specifies an action that the company agrees to take or a condition the company must abide by. Group of answer choices milking the property…
- What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? 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. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?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 existWhich of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.
- Explain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations. Treasury bills are riskier than corporate bonds A firm should select the capital structure that is fully unlevered. Leveraged beta represents fundamental financial risk. MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.Which of the following statements is correct? a. Companies may pay too high a price in a large open market repurchase if it takes too long to complete. b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. c. An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends. d. The tax code encourages companies to pay dividends rather than reinvest earnings. e. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.Which of the following is CORRECT? Select one: a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM. d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. e. All of the above are correct. Which of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…
- 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.a. What are the risks and rewards of investing in the stock market as compared to the bond market?b. “Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets.” Comment.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.) 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.)