Question

M&M Proposition I with tax states that the value of a levered firm increases as the:

Multiple Choice

• Debt-equity ratio increases.

• Inflation rate increases.

• Level of debt decreases.

• Tax rate of the firm decreases.

• Unlevered value of the firm decreases

Absent taxes and market imperfections, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:

Multiple Choice

• Dividend declaration date.

• Date of payment.

• Date of record.

• Ex-dividend date.

• Day after the date of payment.

Answer 1

Question 1 " The correct answer is Option "Level of debt decreases."

According to the Modigilani proposition 1, the value of the firm increases as the interest paid on the debt is tax deductible which increased the value of the firm as the cost to debt decreases by the tax percentage.

Value of firm according to MM Proposition 1 with tax

Value of Levered Firm = Value of unlevered firm + (Tax Rate * Debt)

Question 2: " The correct answer is Option "Ex- dividend date."

The date of ex-dividend is the date on which the value of share trades less by the amount of dividend.

Date of record is the date on which if the shareholder have shares in his dematerialization account the dividend will be paid to them.

Date of declaration is the date on which dividend is declared which is generally the date of board meeting and date of payment is the date on which the final payment is made to the shareholders.