Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
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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Intermediate Financial Management
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Ceteris paribus, current financial market returns will increase as _____. Group of answer choices a. the uncertainty about the productivity of capital goods increases and people become more risk averse b. the uncertainty about the productivity of capital goods increases and people become less risk averse c. the uncertainty about the productivity of capital goods decreases and people become more risk averse d. the uncertainty about the productivity of capital goods decreases and people become less risk aversearrow_forwardIn the case of a perfect capital market, according to Modigliani and Miller Proposition I and II, what is the optimal capitalstructure? When you introduce taxes, how can leverage alter the incentives of managers?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_forward
- Suppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.arrow_forwardIn a few sentences, answer the following question as completely as you can. Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?arrow_forwardWhich of the following statements regarding EVA is NOT CORRECT? Group of answer choices: EVA assumes that equity capital is not free. A firm’s EVA will increase if it achieves the same operating income with less investor-supplied capital. As long as a firm's ROIC is positive, its EVA will be positive. If a firm reports positive net income, its EVA will also be positive. Actions that increase reported net income may not always increase EVA.arrow_forward
- What 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_forwardIs this statement true or false? Give a reason for your answer. "The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio."arrow_forwardWhich of the following actions should a manager take to optimize the firm's value? * Changing the capital structure if and only if the firm's value rises. Changing the capital structure if and only if the firm's value rises to the advantage of inside management Changing the capital structure if and only if the firm's value increases solely to the benefit of debtholders. Changing the capital structure if and only if the firm's value increases, even if it lowers stockholders' value. Changing the capital structure if and only if the firm's value grows and stockholder equity remains stable.arrow_forward
- Which of the following is NOT a tool to measure firm performance? O Return on equity. O Economic value. Market capitalization. Firm branding.arrow_forwardSuppose a company’s return on invested capital is less than itsWACC. What happens to the value of operations if the salesgrowth rate increases? Explain your answer.arrow_forwardWhy should a firm's investments always exceed its cost of capital?arrow_forward
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