Question 5Miller and Modigliani’s nobel prize winning framework provides all of the following insights, except:1 pointGiven efficient markets, cheaper debt is offset by more expensive equity so that the firm’s overall cost of capital remains unchanged. This implies the value of the firm is unchanged.Given efficient markets, increasing cash flows increases the value of the firmWhen firms pay corporate taxes, the value of the firm can increase due to the interest tax shieldWhen firms pay corporate taxes, the firm’s cost of capital decreasesThe firm can identify a range of capital structures to help determine its target debt ratio

7.Which of the following statements best describes Modigliani and Miller (MM) Proposition II for a firm that pays corporate taxes? a.The cost of equity increases linearly as the debt-to-equity ratio increases, unaffected by corporate taxes. b.The value of a leveraged firm is equal to the value of an unleveraged firm plus the tax shield benefits of debt. c.The capital structure is irrelevant to the firm's value, even when corporate taxes are considered. d.The firm's cost of capital increases as the debt-to-equity ratio increases, due to the tax deductibility of interest payments. e.Corporate taxes decrease the overall cost of debt, making equity financing more attractive

Question 1When a firm is determining its target debt ratio, which of the following is paramount? 1 pointThe impact on the firm’s profitsThe impact on the value of the firmThe impact on the control structure and governance The impact on financial flexibilityAll of the above are equally important

Which capital structure theory argues that there is an optimal level of debt for a firm?a.Net income approachb.Net operating income approachc.Traditional approachd.Modigliani-Miller model

Question 3The two key insights that are central to the Miller and Modigliani (MM) theorem are: ____________ and the effect of corporate taxes.1 pointLeveraged firms are more valuablePerfect market efficiencyDebt is cheaper than equityInterest on debt is tax deductible

If a firm increases the proportion of debt in the capital structure:A.The cost of debt will increase but there will be no impact on the cost of equity.B.The cost of equity and the cost of debt will both increase, but its cost of capital will fall.C.The cost of equity will increase, but the impact on the firm’s cost of capital is unclear in the absence of specific information about financial distress costs and the firm’s tax position.D.The cost of equity will increase but the cost of debt will decrease.