Homework Answers
MM proposition says that irrespective of the capital structure the overall cost of capital or WACC remains constant irrespective of the capital structure as increased debt will be compensated by increase in risk for the shareholders making the overall cost of capital constant.
Answer is False
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MM 1963 Proposition states that if the debt-equity ratio increases, the WACC will go up accordingly....
True or False: MM 1963 Proposition states that if the debt-equity ratio increases, the WACC will...
True or False: MM 1963 Proposition states that if the debt-equity ratio increases, the WACC will go up accordingly.
A firm’s capital structure is the particular distribution of debt and equity that makes up the...
A firm’s capital structure is the particular distribution of debt and equity that makes up the finances of a company. a) What does Modigliani-Miller Proposition I (MM I) suggest regarding the choice between debt and equity? b) Modigliani-Miller Proposition II (MM II), proposes that the cost of equity increases dramatically with high levels of debt. Explain why this occurs.
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care...
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care about the firm's debt policy. b. Firm value is unaffected by the firm's capital structure. c. After a change in capital structure, the firm's value should be the same as it was prior to the chance in capital structure. d. The proposition is also called the debt-irrelevance proposition. 29. Regarding MM 1958 proposition, a firm's value is not influenced by a. interest rate paid...
Which of these statements apply MM Proposition II without taxes? I. The expected return on equity...
Which of these statements apply MM Proposition II without taxes? I. The expected return on equity is positively related to leverage. II. The value of a firm cannot be changed by changing its capital structure. III. Risk to equity holders increases with leverage. IV. The expected return on equity is affected by the firm's debt-to-equity ratio. Multiple Choice II and IV only I, II, and III only I, III, and IV only I and III only I, II, III, and...
The M&M proposition II WITHOUT taxes states that: RE rises as more debt is used, and...
The M&M proposition II WITHOUT taxes states that: RE rises as more debt is used, and the WACC is constant. RE rises as more debt is used, and the WACC decreases. RE decreases as more debt is used, and the WACC is constant. RE stays constant as more debt is used, and the WACC is constant.
WACC Kose, Inc., has a target debt-equity ratio of .38. Its WACC is 10.1 percent and...
WACC Kose, Inc., has a target debt-equity ratio of .38. Its WACC is 10.1 percent and the tax rate is 25 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of debt? b. If instead you know that the after tax cost of debt is 6.4 percent, what is the cost of equity?
7. Calculate a firm's approximate WACC given that the debt-to-equity ratio is 3, the cost of...
7. Calculate a firm's approximate WACC given that the debt-to-equity ratio is 3, the cost of debt is 8%, the cost of equity is 15%, and the firm's marginal tax rate is 30%: WACC ............
1. According to M&M Proposition II without taxes, a firm's cost of equity is a function...
1. According to M&M Proposition II without taxes, a firm's cost of equity is a function of the required rate of return on the firm's assets, the firm's debt/equity ratio, and the firm's cost of debt. True or False 2. When EBIT is positive, high leverage decreases the returns to shareholders (as measured by ROE). true or false 3. All else the same, taxes and bankruptcy claims on the cash flows of the firm will tend to increase with decreases...
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to...
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to 1. B) weight of equity is equal to the weight of debt. C) cost of equity is maximized given a pretax cost of debt. D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. E) debt-equity ratio results in the lowest possible weighted average cost of capital. 2. M&M Proposition I with tax implies that the: A) weighted average...
Weston Industries has a debt-equity ratio of 1.6. Its WACC is 7.8 percent, and its cost...
Weston Industries has a debt-equity ratio of 1.6. Its WACC is 7.8 percent, and its cost of debt is 5.5 percent. The corporate tax rate is 21 percent. a. What is the company’s cost of equity capital? b. What is the company’s unlevered cost of equity capital? c-1. What would the cost of equity be if the debt-equity ratio were 2? c-2. What would the cost of equity be if the debt-equity ratio were 1.0? c-3. What would the...
7. Calculate a firm's approximate WACC given that the debt-to-equity ratio is 3, the cost of debt is 8%, the cost of equity is 15%, and the firm's marginal tax rate is 30%: WACC ............
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to 1. B) weight of equity is equal to the weight of debt. C) cost of equity is maximized given a pretax cost of debt. D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. E) debt-equity ratio results in the lowest possible weighted average cost of capital. 2. M&M Proposition I with tax implies that the: A) weighted average...
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