The Modigliani and Miller theorem claims that a) Investment bankers do not know

Question

The Modigliani and Miller theorem claims that a) Investment bankers do not know what they are doing b) A pizza is always big when there are no corporate taxes c) The value of a levered firm is not larger than that of an unlevered in the absence of corporate taxes d) The risk borne by equity holders increases when leverage increases e) both c) and d) f) both c) and b) Depreciation expenses… a) are important sunk costs that are often forgotten by managers b) are expenses that reduce the cash flows of the firm c) are expenses that have no impact on cash flows d) are expenses that reduce taxable income e) both c) and d) f) both b) and d) The Modigliani and Miller theorem claims that a) Investment bankers do not know what they are doing b) A pizza is always big when there are no corporate taxes c) The value of a levered firm is not larger than that of an unlevered in the absence of corporate taxes d) The risk borne by equity holders increases when leverage increases e) both c) and d) f) both c) and b) Depreciation expenses… a) are important sunk costs that are often forgotten by managers b) are expenses that reduce the cash flows of the firm c) are expenses that have no impact on cash flows d) are expenses that reduce taxable income e) both c) and d) f) both b) and d)

Explanation / Answer

Part A

Modigilani Miller claims,

1. WIthout Tax, the capital structure doesn't affect the value of firm

2. FInance Leverage is directly proportion to cost of Equity

Thus C&D is correct.

i.e option "e" correct.

Part B:

Deprecition exp is Non cash Expenditure, thus it is not considered in Cash flow.

As it is non Cash Expenditure, it reduces taxable income.

Thus C&D is correct.

i.e option "E" correct.

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