Miller and Modigliani’s propositions 1 and 2 imply that firms with different re-turns on equity may...

Miller and Modigliani’s propositions 1 and 2 imply that firms with different re-turns on equity may still be equally valuable. (True or False)?

Solutions

Expert Solution

TRUE

Under assumptions of Miller and Modigliani’s propositions 1 and 2:

Capital structure is irrelevant
Return on equity is a linear function of D/E
WACC is constant

Hence the firms can have different ROE due to different D/E, but may have same WACCC and hence valaution.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

1. Modigliani and Miller (MM) have two propositions that they present under three different sets of...

1. Modigliani and Miller (MM) have two propositions that they present under three different sets of assumptions, or cases. The first proposition discusses firm value, and the second proposition estimates the WACC. a) In case 1, MM conclude that how you finance a firm “just doesn’t matter”. What are the key assumptions in this model and how does each influence MMs conclusion? Draw and label a graph and explain what happens to the cost of debt, the cost of equity,...

According to Modigliani-Miller propositions, a firm’s cost of equity in a perfect financial market is determined...

According to Modigliani-Miller propositions, a firm’s cost of equity in a perfect financial market is determined by all of the followings EXCEPT ____. Group of answer choices A. risk-free interest rate B. reward to the total business risk C. reward to the nondiversifiable portion of the business risk D. reward to additional risk added by financial leverage

Even companies with the same business risk may have different expected re-turn on equity, which would...

Even companies with the same business risk may have different expected re-turn on equity, which would however still be in agreement with predictions of the Capital Asset Pricing Model (True or False)?

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus on capital structure? 3. What do you think of a high profit firm like Microsoft with over 200 billion of cash and marketable securities on its balance sheet, would issue debt?

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

Firms 1 and 2 are in the pizza business, but they face slightly different market conditions....

Firms 1 and 2 are in the pizza business, but they face slightly different market conditions. Each firm faces the following demand for its product: Q1=21-3P1+2P2 for firm 1, and Q2=27-3P2+2P1 for firm 2. The cost to each firm of making a pizza is $5; it is constant. Firms can choose any price. a. Find the solution to the Bertrand game (output, price, and profit for each firm). b. Compare it to the cooperative solution. c. Explain why this game...

1. What are two different ways to estimate the cost of equity for a firm? 2....

1. What are two different ways to estimate the cost of equity for a firm? 2. Lewis runs an outdoor adventure company and wants to know what effect a tax change will have on his company’s WACC. Currently Lewis has the following financing pattern: Equity: 35% and cost of 14% Preferred stock: 15% and cost of 11% Debt: 50% and cost of 10% before taxes What is the WACC for Lewis if the tax rate is...

Marginal costs of abatement may different across firms due to a.different aged technology across firms b.different...

Marginal costs of abatement may different across firms due to a.different aged technology across firms b.different raw material used in the production process c.different outputs being produced d.all of the above Technology standards provide an incentive for entrepreneurs in the area of pollution control to develop new ideas. a.True b.False Emissions standards provide no incentive to innovate in terms of pollution control technology. a.True b.False Output based standards provide incentive to innovate by reducing a.emissions per unit of input b.inputs...

QUESTION 1 Firms will likely pay less on inventory holding cost as their inventory turns decreases....

QUESTION 1 Firms will likely pay less on inventory holding cost as their inventory turns decreases. True False QUESTION 2 Firms with higher levels of perishable product, tend keep a higher Days-of-Supply to prepare for unexpected demand. True False QUESTION 3 While Tier 2 suppliers are not always vendors that a manufacturer would order directly from, it's important that they perform audits on these vendors. True False QUESTION 4 Decision-making in supply chain is very important because tactical and strategic...

The United States may be accused of endorsing the idea that firms have several different books,...

The United States may be accused of endorsing the idea that firms have several different books, or records, of a company to reflect the differences among GAAP reporting, tax accounting, managerial accounting, and IFRS. A) Why does this phenomenon exist in the US; whereas, other countries may appear to have a single source of documents for financial and tax reporting? B) Please highlight two, or more, areas of GAAP accounting where US GAAP and IFRS GAAP are not in agreement,...

Subjects