According to Modigliani and Miller, in a perfect market the total value of the firm will be Group of answer choices a. if the firm uses 50% debt and 50% equity financing b. higher when debt is used since the cost of debt is lower than the cost of equity c. higher when equity is used since the firmʹs shareholders are exposed to less risk than if debt is used d.the same regardless of the firmʹs choice of capital structure

According to Modigliani and Miller, in a perfect market the total value of the firm will be Group of answer choices a. if the firm uses 50% debt and 50% equity financing b. higher when debt is used since the cost of debt is lower than the cost of equity c. higher when equity is used since the firmʹs shareholders are exposed to less risk than if debt is used d.the same regardless of the firmʹs choice of capital structure

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

See similar textbooks

Similar questions

Which of the following statements is true? A. Companies look for investments with payback periods that are larger than their maximum accepted payback period B. An investment with a profatibility index less than 1 is profitable and desirable OC. A projected is accepted if the IRR is less than the cost of capital O D. None of the above are true
Which of the following statements regarding the capital structure is CORRECT? Group of answer choices: According to the M&M theory under perfect market assumptions, the value of a firm with no debt is the same as that with 100% debt. A firm's optimal capital structure is one that maximizes both its expected EPS and stock price. The pecking order model predicts that the equity financing is more preferred to debt financing. According to the M&M theory, if only corporate taxes are considered, the optimal capital structure is one with 0% debt financing. According to the static tradeoff model, a firm's optimal capital structure can be obtained by considering the debt-related costs only.
Identify the correct statement: O II EBIT Is expected to be below the indifference point, the firm will prefer the capital structure with more debt O The EBIT-EPS indifference point is the point at which EBIT is the same under two different capital structures O The EBIT-EPS indifference point is always higher for an existing firm compared to a new firm O If EBIT is expected to be above the indifference point the firm will prefer the capital structure with more debt
Answer the following a) When will the different DCF methods use the same discount rate? b) The cost of debt (ka) will change as the capital structure of a firm changes. Why or why not? c) Why does the cost of equity (k.) increase as the amount of debt in the capital structure of a firm increases? Why? d) Freebie Inc.'s common stock has a beta of 1.3. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is its cost of equity capital? e) Why do branded food companies command the highest EBIT multiple (about 8) and transportation companies the lowest (about 3)? f) Should a firm use its cost of capital as a hurdle/discount rate to value all internal divisions? Why or why not? g) An option can have more than one source of value. Consider a mining company. The company can mine for ores today or wait another year (or more) to mine. What real options can you identify here? h) Do you consider dividend payments by the firm in calculating cash flows? Why or why not? i)…
Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
We live in a perfect Modigliani Miller World without frictions. Vencidario Inc. has a mixed capital structure, with both equity and debt. We know the following about its cost of capital:.(i) risk-free rate rf = 10%; (ii) beta of equity bE = 1.5; (iii) cost of debt rD = 12%; (iv) market return rm = 18%; (v) debt-to-value ratio D/V = 0.5. Compute Vencidario Inc.’s cost of assets rA; beta of debt bD; beta of assets bA; and cost of equity rE.
We live in a perfect Modigliani Miller World without frictions. Vencidario Inc. has a mixed capital structure, with both equity and debt. We know the following about its cost of capital:.(i) risk-free rate rf = 10%; (ii) beta of equity bE = 1.5; (iii) cost of debt rD = 12%; (iv) market return rm = 18%; (v) debt-to-value ratio D/V = 0.5. Explain in detail the mechanism behind the reduction of the cost of debt from question 1a) to question 1b). Compare how the cost of equity would have changed from subitem a) to subitem b) if there were no reduction on the cost of debt.
A comparable firm (i.e., same industry and similar operations as our firm) has an equity beta of 1.0 and a debt-to-value ratio of 0.3. The debt of the comparable firm is risk-free. Our firm has a debt-to-value ratio of 0.5. Assuming both firms should have the same asset beta, and that our debt is also risk-free, what is a good estimate of our equity beta? Give your answer to the closest 0.1.
If interaction effects make it difficult for a firm to adjust its capital structure based on prevailing conditions, then Group of answer choices the firm should use as much debt financing as possible when it is financially healthy in order to benefit from lower corporate taxes the firm should target a 50% debt/50% equity capital structure the firm should choose the capital structure that will minimize all transaction costs--both direct and indirect the firm should use more equity financing than is necessarily optimal today
According to the M&M propositions, in a perfect market which of the following statements is true? a.The value of the firm will be equal to the net present value of its underlying projects b.The value of the firm is higher when financed with debt due to its lower cost c.The net present value of a firmʹs projects should exceed the present value of the firmʹs issued claims d.The net present value of a firmʹs projects will be higher if they are financed with debt since debt carries a lower cost
Which of the following statements is most correct? Group of answer choices The optimal capital structure maximizes the WACC. None of these. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
The cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45…