ccording to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of return on equity? Briefly explain including the key aspect
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According to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of
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- what are the shortcomings/ risk implications of improving net profit margin to increase Return on Equity?Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return on assets b. Expected market return c. Risk-free rate of return d. The company's beta
- MM Proposition II states that: I) the expected return on equity is positively related to leverage; II) the required return on equity is a linear function of the firm's debt to equity ratio; III) the risk to equity increases with leverage Multiple Choice: A) I, II, and III B) I only C) II only D) III onlyHow would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to…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
- The capital asset pricing model expresses the cost of equity as a function of a return on riskless assets, a market premium, and: Select one:a. Unsystematic risk.b. None of these.c. The cost of debt.d. Systematic risk.How would each of the following scenarios affect a firm’s cost of debt, kd(1 – T); its cost of equity ke and its WACC? Indicate with a plus sign (+), a minus (-) or a zero if the factor would raise, would lower or would have indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer.V6. Does net debt ratio provide useful information to the investor? Are the NonGAAP measures, ROCE and ROSE, useful and relevant?
- Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not? You need to support your answers with examples.Which of the following businesses are most exposed to interest rate risk? * A. A company with a high equity to debt ratio B. A company with a large amount of floating rate debt C. An al-equity company D. An investment company with an investment portfolio that matches its investment horizon.The NZ Equity market is illiquid, both in the primary and secondary markets. What does market illiquidity mean? What are the reasons for the low liquidity? How might equity market liquidity be improved?