Indicate whether each of the following statements is true or false. Support vour answers with relevant explanations. A) Modigliani and Miller's Proposition II assumes that increased borrowin does not afffect the interest rate on the firm's debt. B) Under the conditions of perfect capital markets the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. C) The higher the systematic risk of a company's stock, the higher the value of its beta. The higher the beta, the higher the return required by investors.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Indicate whether each of the following statements is true or false. Support vour answers with relevant explanations.
A) Modigliani and Miller's Proposition II assumes that increased borrowin does not afffect the interest rate on the firm's debt.
B) Under the conditions of perfect capital markets the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt.
C) The higher the systematic risk of a company's stock, the higher the value of its beta. The higher the beta, the higher the return required by investors.
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