1. A distribution is a payment made by a firm to its owners shareholders from sources other than current or accumulated retained earnings.

2. In general, firms with a greater risk of experiencing financial distress will borrow less than firms with a lower risk of financial distress.

3. M&M Proposition i states that the value of the firm is independent of the firms capital structure.

4. The "information content effect" is the market's reaction to a change in corporate dividend payout.

5. Liquidation refers to the financial restructuring of a failing firm to attempt to continue operations as a going concern.

Solutions

Expert Solution

1. False

A distribution (dividend) are made by firm to its owner's shareholder only from current or accumulated earnings.

2. False

Financial distress is situation when firm has difficulty to pay off its obligation (i.e creditors, interest etc.). Thus, they borrow more money to pay off its obligation.

3. True

M&M Proposition-1 states that capital structure doesn't effect the value of the firm.

4. True

Information content effect refers to change in stock price due to release of price sensitive of information by management of company. Normally, Market reacts to Information about dividend payout and it effect the price of company's share price.

5. False

Liquidation refers to selling of firm's assets to payoff creditors and owner shareholder, Liquidation ceases going concern of the firm.

jeff jeffy answered 1 year ago

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