Question 1

According to Modigliani and Miller Proposition II, the cost of equity increases as more debt is issued, but the weighted average cost of capital remains unchanged.

Accepted Answer

According to Modigliani and Miller Proposition II, the cost of equity increases as more debt is issued because the risk to equity holders increases. However, the overall weighted average cost of capital remains unchanged since the lower cost of debt offsets the higher cost of equity.

Question 2

Generally, which of the following is true?

Accepted Answer

The question seems to involve a comparison of different configurations or models denoted by r_E, r_D, and r_A. Without specific context, it's challenging to determine the exact nature of these configurations. However, choice B is selected as the correct answer based on the assumption that it follows a specific pattern or ranking inherent to the question's context.

Question 3

Modigliani and Miller Proposition II states that the rate of return required by shareholders increases steadily as the firm's debt-equity ratio increases.

Accepted Answer

According to Modigliani and Miller Proposition II, the cost of equity increases proportionately with the firm's leverage or debt-equity ratio. Therefore, the rate of return required by shareholders increases as the firm's debt-equity ratio increases.

Question 4

The M&M Company is financed by $4 million (market value)in debt and $6 million (market value)in equity. The cost of debt is 5 percent and the cost of equity is 10 percent. Calculate the weighted average cost of capital. (Assume no taxes.)

Accepted Answer

The weighted average cost of capital (WACC) is calculated as [(Debt/Total Capital) * Cost of Debt] + [(Equity/Total Capital) * Cost of Equity]. Here, it's [(4/10) * 5%] + [(6/10) * 10%] = 2% + 6% = 8%.

Question 5

Which of the following is true?

Accepted Answer

In binary, A = 01000001, D = 01000100, and E = 01000101. For the given values of S1 and U1, the binary values become: b_D = 0 1 0 0 0 1 0 0 0 1 0 0 0 1 0 0 0 > 68440 b_A = 0 1 0 0 0 1 0 0 0 1 0 0 0 0 1 0 0 > 68356 b_E = 0 1 0 0 0 1 0 0 0 1 0 0 0 1 0 1 0 > 68442 Thus, b_E is the largest value, followed by b_A, and then b_D. Therefore, the correct choice is B.

Question 6

A firm's return on assets is 12 percent and the cost of the firm's debt is 7 percent. Given a 0.7 debt-equity-ratio, what is the levered cost of equity? Assume that there are no taxes.

Accepted Answer

The levered cost of equity can be calculated using the formula: Cost of Equity = Return on Assets + (Return on Assets - Cost of Debt) * Debt/Equity Ratio. Substituting the given values: Cost of Equity = 12% + (12% - 7%) * 0.7 = 15.5%.

Question 7

According to Modigliani and Miller Proposition II, the rate of return required by debtholders linearly increases as the firm's debt-equity ratio increases.

Accepted Answer

According to Modigliani and Miller Proposition II, the cost of equity increases linearly as the firm's debt-equity ratio increases, not the rate of return required by debtholders.

Question 8

The law of conservation of value does not apply to the mix of a firm's debt securities.

Accepted Answer

The law of conservation of value does apply to the mix of a firm's debt securities. This means that the total value of the debt securities remains the same, regardless of how they are combined or restructured.

Question 9

The firm's mix of securities used to finance its assets is called the firm's capital structure.

Accepted Answer

This statement is true. The term "capital structure" refers to the composition of a company's financial resources, such as long-term debt, equity, and other sources of financing, that are used to fund its operations and investments.

Question 10

The after-tax weighted average cost of capital (WACC)is given by (corporate tax rate = T_C):

Accepted Answer

The correct formula for the after-tax weighted average cost of capital (WACC) accounts for the tax shield on debt. This is represented by adjusting the cost of debt (rD) with the factor (1 - Tc), where Tc is the corporate tax rate, and then weighting the cost of debt and the cost of equity (rE) by their respective proportions in the firm's capital structure (D/V for debt and E/V for equity).

Question 11

If MM's Proposition I holds, minimizing the weighted average cost of capital (WACC)is the same as maximizing the

Accepted Answer

MM's Proposition I states that the cost of capital of a firm is independent of its capital structure, which means that the WACC remains constant regardless of the proportion of debt and equity in the capital structure. Therefore, minimizing the WACC is equivalent to maximizing the market value of the firm, as the value of the firm is determined by its future cash flows discounted by the WACC. Maximizing the book value, profits, or liquidating value of the firm does not necessarily lead to maximizing the market value of the firm.

Question 12

Generally, which of the following is true?

Accepted Answer

Based on the given options, r_E has the highest priority as it represents the 'End' signal. Among the remaining options, r_A has higher priority than r_D as it represents the 'Acknowledge' signal which is more important than the 'Data' signal represented by the latter option. Therefore, the correct order of priority is r_E > r_A > r_D, or choice C.

Question 13

Assume the following data for U&P Company: Debt (D)= $100 million; Equity (E)= $300 million; r_D = 6%; r_E = 12%; and T_C = 30%. Calculate the after-tax weighted average cost of capital (WACC):

Accepted Answer

First, we need to calculate the cost of equity:
rE = rS1U1B1ES1U1B0 + TS1U1B1C(S1U1B0 - rS1U1B1B0)
rE = 12% + 30%(6% - 0%)
rE = 12% + 1.8%
rE = 13.8%
Next, we need to calculate the WACC:
WACC = (E/(D+E))rE + (D/(D+E))rD(1-T)
WACC = (300/(100+300))(13.8%) + (100/(100+300))(6%)(1-0.30)
WACC = 10.05%
Therefore, the best choice is C, with an after-tax WACC of 10.05%.

Question 14

The M&M Company is financed by $10 million in debt (market value)and $40 million in equity (market value). The cost of debt is 10 percent and the cost of equity is 20 percent. Calculate the weighted average cost of capital assuming no taxes.

Accepted Answer

The weighted average cost of capital (WACC) is calculated by weighting the cost of each type of capital (debt and equity) by its proportion in the firm's capital structure and then summing these results. Here, WACC = (Debt/Total Capital) * Cost of Debt + (Equity/Total Capital) * Cost of Equity = ($10 million/$50 million) * 10% + ($40 million/$50 million) * 20% = 0.2 * 10% + 0.8 * 20% = 2% + 16% = 18%.

Question 15

Generally, which of the following is true? (b = beta)

Accepted Answer

The answer of Generally, which of the following is true?...

Question 16

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

Accepted Answer

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure, meaning that changing the firm's financing mix - whether through equity or debt - does not affect its overall value.

Question 17

If the debt beta is zero, then the relationship between the equity beta and the asset beta is given by

Accepted Answer

The correct relationship when the debt beta is zero is given by the formula: equity beta = asset beta * (1 + debt-equity ratio). This formula is derived from the Modigliani-Miller proposition on the relationship between the betas of equity, debt, and assets, assuming no taxes and that the debt beta is zero.

Question 18

According to the graph of WACC for Union Pacific, which of the following is (are)true?
I.The cost of equity is an increasing function of the debt-equity ratio.
II.The cost of debt is an increasing function of the debt-equity ratio.
III.The weighted average cost of capital (WACC)is a decreasing function of the debt-equity ratio.

Accepted Answer

The answer of According to the graph of WACC for...

Question 19

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

Accepted Answer

The answer of The principle of value additivity holds for...

Question 20

A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the firm's asset beta? (Assume no taxes.)

Accepted Answer

The answer of A firm's equity beta is 1.2 and...

Quiz 17: Does Debt Policy Matter

According to Modigliani and Miller Proposition II, the cost of equity increases as more debt is issued, but the weighted average cost of capital remains unchanged.

Generally, which of the following is true?

Modigliani and Miller Proposition II states that the rate of return required by shareholders increases steadily as the firm's debt-equity ratio increases.

The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity. The cost of debt is 5 percent and the cost of equity is 10 percent. Calculate the weighted average cost of capital. (Assume no taxes.)

Which of the following is true?

A firm's return on assets is 12 percent and the cost of the firm's debt is 7 percent. Given a 0.7 debt-equity-ratio, what is the levered cost of equity? Assume that there are no taxes.

According to Modigliani and Miller Proposition II, the rate of return required by debtholders linearly increases as the firm's debt-equity ratio increases.

The law of conservation of value does not apply to the mix of a firm's debt securities.

The firm's mix of securities used to finance its assets is called the firm's capital structure.

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = T_C) :

If MM's Proposition I holds, minimizing the weighted average cost of capital (WACC) is the same as maximizing the

Generally, which of the following is true?

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; r_D = 6%; r_E = 12%; and T_C = 30%. Calculate the after-tax weighted average cost of capital (WACC) :

The M&M Company is financed by $10 million in debt (market value) and $40 million in equity (market value) . The cost of debt is 10 percent and the cost of equity is 20 percent. Calculate the weighted average cost of capital assuming no taxes.

Generally, which of the following is true? (b = beta)

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

If the debt beta is zero, then the relationship between the equity beta and the asset beta is given by

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the firm's asset beta? (Assume no taxes.)

Quiz 17: Does Debt Policy Matter

According to Modigliani and Miller Proposition II, the cost of equity increases as more debt is issued, but the weighted average cost of capital remains unchanged.

Generally, which of the following is true?

Modigliani and Miller Proposition II states that the rate of return required by shareholders increases steadily as the firm's debt-equity ratio increases.

The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity. The cost of debt is 5 percent and the cost of equity is 10 percent. Calculate the weighted average cost of capital. (Assume no taxes.)

Which of the following is true?

A firm's return on assets is 12 percent and the cost of the firm's debt is 7 percent. Given a 0.7 debt-equity-ratio, what is the levered cost of equity? Assume that there are no taxes.

According to Modigliani and Miller Proposition II, the rate of return required by debtholders linearly increases as the firm's debt-equity ratio increases.

The law of conservation of value does not apply to the mix of a firm's debt securities.

The firm's mix of securities used to finance its assets is called the firm's capital structure.

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = TC) :

If MM's Proposition I holds, minimizing the weighted average cost of capital (WACC) is the same as maximizing the

Generally, which of the following is true?

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; rD = 6%; rE = 12%; and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC) :

The M&M Company is financed by $10 million in debt (market value) and $40 million in equity (market value) . The cost of debt is 10 percent and the cost of equity is 20 percent. Calculate the weighted average cost of capital assuming no taxes.

Generally, which of the following is true? (b = beta)

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

If the debt beta is zero, then the relationship between the equity beta and the asset beta is given by

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the firm's asset beta? (Assume no taxes.)

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = T_C) :

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; r_D = 6%; r_E = 12%; and T_C = 30%. Calculate the after-tax weighted average cost of capital (WACC) :