or debto states that a fim borrows up to the resulting increase in bankruptcy co
ID: 2620445 • Letter: O
Question
or debto states that a fim borrows up to the resulting increase in bankruptcy costs. dollar of debt is just equal to the expense of the M&M;) Proposition I without taxes and without tax shield from ws up to the point where the benefit of the interest banka and Miller Proposition odiglian: a bankruptcy costs b) The Modigliani and Miller Proposition tcy costs er (M&M;) Proposition II without taxes and without c) The static theory (or trade-off theory) of capita d) The pecking-order theory Which of the following is a FALSE statement a) 12. The annual percentage rate interest rate oAPR) on a loan requiring monthly payments is b) W a you actually pay. c) Compounding will typicaly lal hen comparing investments it is best not to rely solely on q ompounding will typi d) With monthly compounding, cally lead to differences between quoted and effective rates. ing, the annual percentage rate (APR) will be smaller than perce the effective annual rate. ering two perpetuities which are identical in every way, except that gin making annual payments of SP to you two years from today while nt for perpetuity B will occur one year from today. It must be true that 13. You are consid perpetuity A will the first SP payme the present value of perpetuity a) A is greater than that of B by SEP b) B is greater than that of A by SP c) B exceeds that of A by the present value of SP for one year d) A exceeds that of B by the present value of SP for one year 14. Given no change in required return (R), the price of the stock whose dividend is constant . Assume that the required return on the stock is positive. a) Remain unchanged b) Increase over time at a rate of R% c) Decrease over time at a rate of R% d) Decrease over time at a rate equal to the dividend growth rate According to the constant dividend growth model (or Gordon model), which of the following statement is incorrect? a) Assume that the required rate of return on a given stock is 13 percent. If the stock's 15. dividend is growing at a constant rate of 5 percent, its expected dividend yield is 8 dividend yield on a stock is equal to the required rate of return less the ted capital gains yield can be greater than the expected dividend yield percent. b) A stock's expected dividend yield must equal the expected growth rate. expected capital gains yield.Explanation / Answer
11)
The static theory of capital structure says that the firm's optimal capital structure is determined by the point at which marginal benefit of tax shield due to additional borrowing equals the marginal cost due to increase in bankruptcy cost.
Hence option (c) is correct.
12)
For a loan with monthly payments, the effective annual rate will be higher than the APR due to monthly compounding. Therefore the actual interest rate paid is higher than the APR.
Hence option (a) is the answer.
13)
Both A and B will have similar cashflow except the additional cash flow for B in the year 1 of amount $P.
Therefore the present value of B will be higher than that of A by a present value of $P for one year.
Hence option (c) is correct.
14)
Assuming that dividend is D and it remains constant forever. The stock price is the present value of future dividends. Since the required return is R, therefore the present value of the dividend will be D/R for any year i.e. price remains constant.
Hence option (a) is correct.
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