Question Details

Capital Structure and Leverage



11. Modigliani and Miller (MM) show that under a restrictive set of assumptions that a firm- value is unaffected by its capital structure. Which of the following are not assumptions used by MM?
a. no brokerage costs, no taxes, and no bankruptcy costs
b. investors borrow at the same rate as corporations
c. all investors have the same information as investors about the firm- future investment opportunities
d. EBIT is not affected by the use of debt
e. all of the above assumptions are used by MM


12. Signaling theory suggests firms should in normal times maintain reserve borrowing capacity that can be used if an especially good investment opportunity comes along.
a. True
b. False


13. In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures.
a. True
b. False


14. According to the “trade-off theory,” an increase in the costs of bankruptcy would lead firms to 		 the amount of debt in their capital structures.
a. reduce
b. leave unchanged
c. increase


15. The situation in which managers have different (presumably better) information about firms’ prospects than do investors is called:
a. symmetric information.
b. asymmetric information.
c. signal information.
d. reserve borrowing capacity.



Business Assignment Help, Business Homework help, Business Study Help, Business Course Help