Intermediate Financial Management (MindTap Course List)
12th Edition
ISBN: 9781285850030
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 17, Problem 4Q
Modigliani and Miller assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?
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Modigliani and Miller assumed that firms do not grow. How does positivegrowth change their conclusions about the value of the levered firm and itscost of capital?
Why is a firm’s value maximized if it invests to the point where its marginal return onnew investment is equal to its marginal cost of capital?
Would a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.
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Intermediate Financial Management (MindTap Course List)
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- What effect would a decreased cost of capital have on a firm's future investments?arrow_forwardIn the case of a perfect capital market, according to Modigliani and Miller Proposition I and II, what is the optimal capitalstructure? When you introduce taxes, how can leverage alter the incentives of managers?arrow_forwardSuppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.arrow_forward
- In a few sentences, answer the following question as completely as you can. Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?arrow_forwardWhich of the following statements regarding EVA is NOT CORRECT? Group of answer choices: EVA assumes that equity capital is not free. A firm’s EVA will increase if it achieves the same operating income with less investor-supplied capital. As long as a firm's ROIC is positive, its EVA will be positive. If a firm reports positive net income, its EVA will also be positive. Actions that increase reported net income may not always increase EVA.arrow_forwardWhat does the MM theory with no taxes state about the valueof a levered firm versus the value of an otherwise identical butunlevered firm? What does this imply about the optimal capitalstructure?arrow_forward
- Is this statement true or false? Give a reason for your answer. "The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio."arrow_forwardWhich of the following actions should a manager take to optimize the firm's value? * Changing the capital structure if and only if the firm's value rises. Changing the capital structure if and only if the firm's value rises to the advantage of inside management Changing the capital structure if and only if the firm's value increases solely to the benefit of debtholders. Changing the capital structure if and only if the firm's value increases, even if it lowers stockholders' value. Changing the capital structure if and only if the firm's value grows and stockholder equity remains stable.arrow_forwardWhich of the following is NOT a tool to measure firm performance? O Return on equity. O Economic value. Market capitalization. Firm branding.arrow_forward
- Why should a firm's investments always exceed its cost of capital?arrow_forwardCan Retained Earnings grow too large? If so, what strategies might management take to reduce it?arrow_forwardDoes decreasing net margin percentages and slightly increasing financial leverage have an effect on Return on Equity (ROE)?. If Yes, What should a company do to solve such problem.arrow_forward
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