CORPORATE FINANCE (LL)-W/ACCESS
11th Edition
ISBN: 9781259976360
Author: Ross
Publisher: MCG
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Chapter 17, Problem 5CQ
MM and Bankruptcy Costs How does the existence of financial distress costs and agency costs affect Modigliani and Miller's theory in a world where corporations pay taxes?
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Which of the following is not an assumption made by Modigliani and Miller in relation to the independence hypothesis concerning capital structure?a. No taxesb. There are no bankruptcy costsc. Equal borrowing rates for individual and businessesd. There is imperfect informatione. All of the above are assumptions made by Modigliani and Miller under the independence hypothesis
Chapter 17 Solutions
CORPORATE FINANCE (LL)-W/ACCESS
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
Ch. 17 - Firm Value Janetta Corp. has EBIT of 5850,000 per...Ch. 17 - Agency Costs Tom Scott is the owner, president and...Ch. 17 - Nonmarketed Claims Dream, Inc., has debt...Ch. 17 - Prob. 4QPCh. 17 - Capital Structure and Growth Edwards Construction...Ch. 17 - Prob. 6QPCh. 17 - Agency Costs Fountain Corporations economists...Ch. 17 - Financial Distress Good Time Company is a regional...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - What is the expected value of the company in one...Ch. 17 - Prob. 2MCCh. 17 - One year from now, how much value creation is...Ch. 17 - Prob. 4MCCh. 17 - Prob. 5MCCh. 17 - Prob. 6MC
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- In Modigliani and Miller Proposition II: A. bankruptcy costs and taxes are ignored B. bankruptcy costs and taxes are taken into account C. bankruptcy costs are ignored and taxes are taken into account D. bankruptcy costs are taken into account and taxes are ignoredarrow_forwardWhich of the following terms refer to the situation in which a firm has negative net worth? Multiple Choice Legal bankruptcy. Liquidation. Accounting insolvency. Technical insolvency. Business failure.arrow_forwardWhy are the costs of selling equity for a corporation so much larger than the costs of selling debt?arrow_forward
- Accounting When you claim that a corporation has negative working capital, what does it mean?arrow_forwardWhy do the companies in high tax brackets incur lower after-tax interest costs by financing through debt?arrow_forward1. What is the effect of financial distress and taxation on gearing? A. Both constrain gearing B. The tax constrains gearing; financial distress pushes for increased gearing C. The tax pushes for increased gearing; financial distress constrains gearing D. Both push for increased gearingarrow_forward
- Which of the following is not primary reason why corporation invest in debt . Select one: a. they are required by law b. they wish to move into new market c. they have excess cash d. they wish to gain control of competitorarrow_forwardWhat is fairness (in bankruptcy)?arrow_forwardUnder Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occursarrow_forward
- (a) – Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper Then Equity Finance? (b) – Compare Dividend Valuation Model with Capital Asset Pricing Model in the context of calculating cost of equity? Can use of these two methods result in differing values of business?arrow_forwardIndicate whether the following statements is true or false. Provide the relevant explanations. In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forwardIndicate whether each of the following statements is true or false. Support vour answers with relevant explanations. A) The higher the proportion of equity in a company's overall capital structure the higher return required by its debtholders.B) In the presence of corporate taxes, a company would prefer to raide debt only when the benefits of the tax shield fully offset the cost of debt. C) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company.arrow_forward
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