Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Question
Chapter 17, Problem 14PS
Summary Introduction
To discuss: The validity of the objection that “MM entirely ignores the fact that if borrow more, the payment of a rate of interest will be high”.
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Students have asked these similar questions
9. Reinvest risk is lowest during a period of low interest rates. Also called clean loans. Is this true or false? Why?
20 Which of the following is the positive impact of inflation?
Inflation makes debtors pay less in real return.
Fixed-income people have the same income but a high cost of living.
A lender will not have the option to earn interest.
Inflation causes the real value of saving for a saving person to eroded.
EXERCISE 1Indicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.
A. Modigliani and Miller’s Proposition II assumes that increased borrowing doesnot affect the interest rate on the firm’s debt. (Explain your reasoning.)
Chapter 17 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - Prob. 3PSCh. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - Prob. 8PSCh. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Prob. 10PSCh. 17 - Prob. 11PS
Ch. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - Prob. 14PSCh. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 16PSCh. 17 - Prob. 17PSCh. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - Prob. 20PSCh. 17 - Prob. 21PSCh. 17 - Prob. 22PSCh. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- 1. Modes of extinguishing obligations when creditor abandons his right to collect. (PLEASE EXPLAIN YOUR ANSWER) A. Condonation B. Forfeiture C. Debt D. Damages 2. Fall after the increase reaches a certain variable amount, this is called: (PLEASE EXPLAIN YOUR ANSWER) A. Process factor B. Law of return C. Inflation D. Supply & demand 3. It is always true that the effective rate is greater than the nominal rate when m ≥ 2. (PLEASE EXPLAIN YOUR ANSWER) A. True B. False 4. (A/F, i%, N) = (A/P, i%, N) + i (PLEASE EXPLAIN YOUR ANSWER) A. True B. Falsearrow_forward4. How can effective APR differ from nominal interest? A. Effective APR takes loan fees into account, while nominal interest does not. B. Effective APR will always be less than the nominal interest rate. C. Effective APR is less accurate than the nominal interest rate. D. Nominal interest takes loan fees into account, while effective APR does not.arrow_forwardChoose correct option, Q) Holding a currency to the gold standard works: a.for everyone, benefiting both savers and borrowers. b.to the advantage of borrowers at the expense of savers. c.for no one, and hurts both savers and borrowers from access to money. d.to the advantage of savers at the expense of borrowers. Solve this with short explanationarrow_forward
- 39. Small savers prefer to use financial intermediaries rather than lending directly to borrowers because: A. financial intermediaries offer the savers a wide portfolio of financial instruments B. financial intermediaries offer much higher interest rates than can be obtained directly from borrowers C. borrowers dislike dealing with savers D. savers have a claim with the borrower by way of the financial intermediaryarrow_forward9. How does a lender reduce interest rate risk?arrow_forwardInstructions: Choose the right answer w/ explanation. [1]. Interest rates have been at lowest levels due to the impact of pandemic. What would be the optimal strategy for fixed income investors? Lend short to minimize interest rate risk Lend long to reduce interest rate risk Lend long to lock in rates before rates start to rise All of the above statements are not reasonable strategies to improve returnsarrow_forward
- H5. explain what the benefits of escrow for both the borrower and the lender may be? Do disadvantages exist for either party? If you were looking to purchase an investment property would you be interested in an escrow account? Explain.arrow_forwardQUESTION 15 Which of the following is a correct interpretation of r = i - pi? Nominal interest rate is real interest rate adjusted for inflation. Real interest rate is inflation adjusted for nominal interest rate. Inflation is real interest rate adjusted for nominal interest rate. Negative real interest rate is possible. Negative real interest rate is favorable to the lenders.arrow_forwardQuestion: It is argued that interest rate should be allowed to an extend of inflation rate so that lender purchasing power may not go down.answer this argumentarrow_forward
- 8. Commercial papers are money market instruments. Also called clean loans. Is this true or false? Why?arrow_forwardNegative Interest rate a. This action was meant to complement the quantitative easing b. encourages banks to lend more instead of keeping them as excess reserves. c. Customers will consume more and deposit less. all are correct.arrow_forwardQUESTION 9 The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because ... the risk of default is lower on secured loans. secured loans are less risky than unsecured loans. it is costly to negotiate and administer secured loans. lenders of secured loans must pay more for their funds.arrow_forward
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