Firms pay out all of their earnings as dividends

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Reference no: EM13934729

Modigliani and Miller assumed that firms pay out all of their earnings as dividends. Therefore, they theorized that firms do not grow. Firms do grow, however, and as capital structure theory advanced, an extension to the MM model with taxes was developed that incorporated growth.

Indicate whether each of the following statements about MM model and the extension for growth is true or false:

- The value of a growing tax shield is greater than the value of a constant tax shield.

- Using the MM extension for growth, a growing firm's levered cost of equity is less than the levered cost of equity under MM's original (with tax) assumptions.

- In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

- Using the MM extension for growth, a growing firm's WACC is greater than the WACC under MM's original (with tax) assumptions.

Reference no: EM13934729

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