Reference no: EM131176405
When the assumptions of Modigliani and Miller’s Irrelevance Hypothesis regarding corporate capital structure are relaxed so that they are more consistent with real-world conditions, i.e. there are corporate taxes (and interest payments are tax deductible) and there are costs of financial distress, then which of the following is true?
Firm value increases and WACC increases initially as more debt is added to the firm's capital structure, however, there comes a point where adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. After this point, firm value and WACC start to decrease as more debt is added.
Each firm has an optimal capital structure where firm value is minimized.
Firm value and WACC are independent of the firm's capital structure.
Firm value increases and WACC decreases initially as more debt is added to the firm's capital structure, however, there comes a point where adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. After this point, firm value starts to decrease and WACC starts to increase as more debt is added.
Each firm has an optimal capital structure where WACC is maximized.
|
Appreciation or depreciation rate for each currency
: If we are comparing the U.S. dollar to the euro, and the euro increased in value from $1.35 to $1.45, what happened to the two currencies? Show the appreciation or depreciation rate for each currency. If we are comparing the U.S. dollar to the yen, a..
|
|
Calculate the financial information of a new product
: Calculate the financial information of a new product launch including forecasting demand, break even analysis, sales, promotional budget, and marketing expenses for three years by quarter for a new product launch
|
|
The option creates portfolio that is gamma neutral
: A portfolio of derivatives on a stock has a delta of 2400 and a gamma of –100. An option on the stock with a delta of 0.6 and a gamma of 0.04 can be traded. What position in the option creates a portfolio that is gamma neutral? Give size of position ..
|
|
What is intrinsic value of equity and value of operations
: Bayani Bakery's most recent FCF was $50 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 12% and it has 15 million shares of common stock outstanding. What is the value of operations? How many shares will be repurchas..
|
|
Firm value-wacc are independent of firm capital structure
: When the assumptions of Modigliani and Miller’s Irrelevance Hypothesis regarding corporate capital structure are relaxed so that they are more consistent with real-world conditions, i.e. there are corporate taxes (and interest payments are tax deduct..
|
|
Unrecorded liabilities
: Search for Unrecorded Liabilities. C. Marsh, CPA, is the independent auditor for Compufast Corporation (Compufast), which sells personal computers, peripheral equipment (printers, data storage), and a wide variety of programs for business and games.
|
|
What should be the price of symantec stock today
: Symantec does not currently pay a dividend, however, in 4 years you expect they will pay their first dividend and it will be $2 per share. The dividend is expected to grow at a rate of 5% and investors’ required rate of return for Symantec stock is 1..
|
|
What should you be willing to pay for magnetek stock
: Magnetek Corp has just paid a dividend of $2 per share and you are now considering purchasing this stock. Analysts have estimated that Magnetek's dividend will grow at 4% per year in perpetuity. Given the riskiness of Magnetek stock, shareholders' re..
|
|
Symantec does not currently pay dividend
: Symantec does not currently pay a dividend, however, in 4 years you expect they will pay their first dividend and it will be $2 per share. The dividend is expected to grow at a rate of 4% and investors’ required rate of return for Symantec stock is 8..
|