Corporate Finance 400 Professor Kim -100/230 points of final grade - 20 questions on exam

In perfect world, value is independent of capital structure

TRUE - proven using homemade leverage strategy

RWACC increases with leverage

FALSE (because of MM1 strategy)

In perfect world, cost of equity is independent of capital structure

FALSE

Cost of Capital will always INCREASE with leverage

TRUE

In a world with corporate tax, the value of the firm is independent of capital structure

FALSE

In a world with corporate tax, RWACC is independent of capital structure

FALSE

What is Optimal Capital Structure

leverage of debt, where firm maximizes firm value, minimizes RWACC

Company must pay debtholders first, equity holders last

TRUE

WACC decrease with corporate tax

TRUE

Risk of equity increases with leverage

TRUE

with no taxes MM Proposition I states that the overall cost of capital, rwacc, does not change when capital structure change

TRUE

The stock price is unaffected by the capital structure change in a world with no taxes.

true

Modigliani-Miller (MM) with corporate taxes, the Value of the Firm ($V$) increases by the present value of the tax shield (PVTS) when leverage is introduced.

The Modigliani-Miller theorem suggests that, in the presence of corporate taxes, a firm's value increases due to the tax benefits associated with debt financing, represented by the present value of the tax shield.