Please say whether each of the following statements is true or false. For each statement, give reasons in one or two sentences. 1. In a Modigliani and Miller world with corporate taxes, the cost of capital is decreasing in the debt to equity ratio. 2. In a Modigliani and Miller world with no taxes, dividends should be paid out only if the firm has free cash flows. 3. Covenants on corporate bonds are a way in which bondholders protect their investment from moral hazard. 4. Most of the gains generated by private equity investments tend to go to the shareholders of the target company. 5. In an incentive compatible contract, the share of profits given to the agent is decreasing in the strength of the conflict of interest between the principal and the agent. 6. Keeping capital structure constant, a company’s cost of capital is increasing in the beta of its shares. 7. According to the Trade-off theory, firms with uncertain cash flows can afford to carry more debt. 8. In a Modigliani-Miller world with no taxes, firms always prefer to pay dividends over undertaking stock repurchases.
Please say whether each of the following statements is true or false. For each statement, give reasons in one or two sentences.
1. In a Modigliani and Miller world with corporate taxes, the cost of capital is decreasing in the debt to equity ratio.
2. In a Modigliani and Miller world with no taxes, dividends should be paid out only if the firm has free cash flows.
3. Covenants on corporate bonds are a way in which bondholders protect their investment from moral hazard.
4. Most of the gains generated by private equity investments tend to go to the shareholders of the target company.
5. In an incentive compatible contract, the share of profits given to the agent is decreasing in the strength of the conflict of interest between the principal and the agent.
6. Keeping capital structure constant, a company’s cost of capital is increasing in the beta of its shares.
7. According to the Trade-off theory, firms with uncertain cash flows can afford to carry more debt.
8. In a Modigliani-Miller world with no taxes, firms always prefer to pay dividends over undertaking stock repurchases.
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