Answer Choices:
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False
Answer: False
Question: Modigliani and Miller’s first article led to the conclusion that capital structure is extremely important, and that every firm has an optimal capital structure that maximizes its value and minimizes its cost of capital.
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False
Answer: False
Question: In a world with no taxes, Modigliani and Miller (MM) show that a firm’s capital structure does not affect its value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., the firm’s value rises as it uses more and more debt, other things held constant.
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False
Answer: True
Question: Is it possible for Firms A and B to have identical financial and operating leverage, yet for Firm A to have more risk as measured by the variability of EPS. This would occur if Firm A has more business risk than Firm B.
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False
Answer: True
Question: As the text indicates, a firm’s financial risk can and should be divided into separate market and diversifiable risk components.
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False
Answer: False