(1) Modigliani-Miller Proposition I with NO taxes in a perfect capital market te

ID: 2647803 • Letter: #

Question

(1) Modigliani-Miller Proposition I with NO taxes in a perfect capital market tells us that

A. The value of the levered firm is greater than the value of the unlevered firm.

B. The value of the levered firm is smaller than the value of the unlevered firm.

C. The value of the levered firm is the same as the value of the unlevered firm.

D. The value of the levered firm is equal to the market value of debt.

(2) Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?

A. exceptionally high depreciation expenses

B. very low marginal tax rate

C. low probabilities of financial distress

D. minimal taxable income

(3) The capital structure that maximizes the value of a firm also:

A. minimizes financial distress costs.

B. minimizes the cost of capital.

C. maximizes the present value of the tax shield on debt.

D. maximizes the value of the debt.

(4) Which form of financing do firms prefer to use first according to the pecking-order theory?

A. debt

B. common stock

C. preferred stock

D. internal funds

(1) Modigliani-Miller Proposition I with NO taxes in a perfect capital market tells us that

C. The value of the levered firm is the same as the value of the unlevered firm.

(2) Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?

C. low probabilities of financial distress

(3) The capital structure that maximizes the value of a firm also:

B. minimizes the cost of capital

(4) Which form of financing do firms prefer to use first according to the pecking-order theory?

C. The value of the levered firm is the same as the value of the unlevered firm.

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