1．Modigliani and Miller demonstrated that if corporate taxes are introduced into an otherwise perfect world, the optimal capital structure would be: A) all equity. B) an equal amount of debt and equity. C) whatever the firm can finance internally through retained earnings. D) all debt. The correct answer was D) In this almost perfect world, the tax deductibility of interest payments encourages firms to use more debt in their capital structures. Since the more the firm borrows the greater the tax write-offs, the firm is encouraged to hold the maximum amount of debt possible. There could essentially be a single equity share, making up a very small portion of the financing, and the remainder, essentially 100 percent, would be financed with debt. 2．Modigliani and Miller demonstrated that if corporate taxes and bankruptcy costs are introduced into an otherwise perfect world the weighted average cost of capital (WACC) will: A) rise, then plateau, and finally start to fall. B) fall continuously as more debt is added to the capital structure. C) not change across the various levels of debt in the capital structure. D) fall, then bottom out, and finally start to rise. The correct answer was D) The WACC first falls because bondholders take less risk and, consequently, have a lower required rate of return. In addition, interest expenses are tax deductible. However, as the amount of debt rises, financial risk rises, and the chance for bankruptcy increases. If there are positive bankruptcy costs, both bondholders and stockholders will require increasingly higher rates of return as financial risk increases causing the WACC to rise. This rise offsets the benefits of using the cheaper source of financing. 3．Which of the following statements about capital structure theories is TRUE? A) In a world with taxes and bankruptcy costs one would expect there to be an optimal capital structure where the cost of capital is minimized and share price is maximized. B) In a Modigliani and Miller (MM) world with taxes, but no bankruptcy cost, you would expect to see firms taking on very little debt. C) Based on signaling theory, if a firm issues new common stock it means that the firm thinks future investment prospects are better than normal. D) In a perfect no tax world, MM would tell you that the firm's WACC is increasing and the firm's capital structure will influence the firm's stock price. The correct answer was A) The other statements are false. In a tax world without bankruptcy the optimal capital structure is 100% debt. When firms issue new equity investment projects look poor. In a perfect no tax world, MM would tell you that the firm's WACC is constant and the firm's capital structure does not influence the firm's stock price. 4.Which of the following statements about a firm's capital structure is FALSE? A) If bankruptcy costs were included into the M&M analysis of capital structure in a tax world there would be an optimal capital structure between no debt and all debt. B) The firm's share price is maximized when the firm maximizes its earnings per share while it minimizes its cost of capital. C) The optimal capital structure is the one that minimizes the weighted average cost of capital and consequently maximizes the value of the firm's share price. D) If the corporate tax rate were increased you would expect to find an increase use of leverage in most firms capital structures. The correct answer was B) The optimal capital structure is the one that maximizes stock price and minimizes the WACC. The optimal capital structure is not the one that maximizes the firm’s EPS. | 
发表于 2008-4-17 18:28
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