Suppose that we have an unlevered firm U and a levered firm L, which differ only in terms of the capital structure. Firm L has equity E and debt D.(>0). Firm U has equity Ey. Suppose the assumptions of M&M theorem holds. Both investors and the firm have the same lending and borrowing rate r. Then answer questions 13 to 16.
10. How many statements below about cash flows are correct? i. The two firms have the same amount of taxation. ii. The two firms have the same cash flow from assets (CFFA). iii. The two firms have the same cash flow to equity holders. iv. The two firms have the same cash flow to creditors.
Your choice: a. one; b. two; c. three; d. four.
11. How many statements below about firm value and cost of capital are correct? i. The levered firm value is E, + D, and the unlevered firm value is Ey ii. The levered firm’s value is equal to the unlevered firm’s value. iii. The levered firm’s WACC is equal to the unlevered firm’s WACC. iv. The levered firm’s equity return is different from the unlevered firm’s equity return.
Your choice: a. one; b. two; c. three; d. four.
12. Suppose you want to implement the following two strategies: (1) Buy 10% equity of firm L; (2) Buy 10% equity of firm U, and borrow for an amount 0.1D i.e., the same amount as 10% of the levered firm’s debt). Which statement below is wrong?
a. The cost of the two strategies are different.
b. The cost of the first strategy is 0.1 EL
c. The two strategies generate the same cash flows to you.
d. If the two strategies have different initial costs, then there is an arbitrage opportunity.
e. You create leverage by borrowing for yourself in the second strategy.
15. If we introduce positive tax rate to the M&M world, which statement below is incorrect?
a. The cost of equity is above the after-tax cost of debt.
b. As leverage increases, the required rate of return for equity increases.
c. As leverage increases, WACC remains the same.
d. As leverage increases, the after-tax cost of debt remains the same.
e. As leverage increases, the value of the firm increases.
16. Suppose we introduce bankruptcy to the M&M world, which statement below is incorrect?
a. As leverage increases, the probability of bankruptcy increases.
b. As leverage increases, WACC increases.
c. As leverage increases, the value of the firm increases.
d. As leverage increases, the required rate of return for equity increases. Get Custom Essay Writing help today
Why Homework Market
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.
If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account.
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. We will always strive to deliver on time.
We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text.
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
No need to work on essay at night. Sleep tight, we will cover your back. We offer all kinds of essay writing services.
No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.
An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.
Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.
If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied.