Exam 13: Does Debt Policy Matter

Modigliani and Miller's Proposition I states that:

Generally, which of the following is true?

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

Financial leverage increases the expected return and risk of the shareholder.

The law of conservation of value implies that: I. the mix of common stock and preferred stock does not affect the value of the firm II. the mix of long-term and short-term debt does not affect the value of the firm III. the mix of secured and unsecured debt does not affect the value of the firm

When comparing levered vs. unlevered capital structures, leverage works to increase EPS For high levels of operating income because:

State and explain MM's Proposition II.

The law of conservation of value implies that:

For a levered firm, return on equity (rE) is equal to:

Explain the concept of arbitrage.

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

Under what conditions would a policy of maximizing the value of the firm not the same as a policy of maximizing shareholders' wealth?

State the generalized version of Modigliani-Miller proposition I.

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

If a firm is unlevered and has a cost of equity capital 9%, what would the cost of equity be if the firms became levered at a debt-equity ratio of 2? The expected cost of debt is 7%. (Assume no taxes.)

State the law of conservation of value.

The total market value (V) of the securities of a firm with both debt (D) and equity (E) is:

"Value additivity" works for: I. combining assets II. splitting up of assets III. mix of debt securities issued by the firm