Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 17, Problem 2Q
Modigliani and Miller assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?
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Modigliani and Miller assumed that firms do not grow. How does positivegrowth change their conclusions about the value of the levered firm and itscost of capital?
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Intermediate Financial Management (MindTap Course List)
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- Would a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.arrow_forwardAccording to Modigliani and Miller, what happens to the cost of equity when the firm increases its leverage? What happens to the firm's WACC?arrow_forwardWhat make ROE(return on equity) of a company decrease further into negatives even though their financial leverage starts to rises? If a company multiplier for financial leverage starts to rise, what does it implies? Why?arrow_forward
- Based on M & M with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of their firm? The bird in hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio. Is this so and why? the homemade dividend strategy argues that investors impose their dividend preference on the firm. is this true or false and whyarrow_forwardConsider the following statements: The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming perfect markets and no taxation is that: I. a firm cannot affect its value by changing its capital structure II. the value of the firm is determined by its total cash flows III. the weighted average cost of capital increases as financial leverage decreases IV. the weighted average cost of capital decreases as financial leverage decreases V. the weighted average cost of capital remains the same whatever the level of financial leverage. Which of the statements is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a I and V only I, Il and V only II, II and IV only None of the above I and Il onlyarrow_forwardConsider the following statements: The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming perfect markets and no taxation is that: I. a firm cannot affect its value by changing its capital structure II. the value of the firm is determined by its total cash flows III. the weighted average cost of capital increases as financial leverage decreases IV. the weighted average cost of capital decreases as financial leverage decreases V. the weighted average cost of capital remains the same whatever the level of financial leverage. Which of the statements is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a I and V only b I, II and V only c II, III and IV only d None of the above e I and II onlyarrow_forward
- Explain the concept of terminal growth rate and discuss why it is impossible for firms with good management to have a terminal growth rate higher than industry or market growth rate forever.arrow_forwardIn a few sentences, answer the following question as completely as you can. Given our goals of firm value and shareholder wealth maximization, we have stressed the importance of NPV. Yet many financial decision makers at well-known firms continue to use less desirable measures (such as payback period) rather than more desirable measures (such as payback period and AAR, in addition to the NPV and IRR). Why do you think this is the case?arrow_forwardWhich of the following is NOT a conclusion drawn from M&M's Propositions 1 and 2? a. Shareholder's required return rises with leverage. b. The WACC does not change as capital structure change. c. Firm value is determined by the left hand of the balance sheet the firm's assets, and the cash flow generated by them. d. The WACC is determined by the riskiness of the company's business (assets). e. A firm can change its market value by splitting its cash flows into different streams.arrow_forward
- suppose a company's return on invested capital is less than its wacc. what happens to the value of operations if the sales growth increases? Explain your answerarrow_forwardWhich of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratioarrow_forwardWhat does the MM theory with no taxes state about the valueof a levered firm versus the value of an otherwise identical butunlevered firm? What does this imply about the optimal capitalstructure?arrow_forward
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