Question : [11].Modigliani and Miller's first article led to the conclusion that : 1416418

 

^[11].Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no effect on a firm's value.

 

a.True

b.False

 

^[12].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.

 

a.True

b.False

 

^[13].It is 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.

 

a.True

b.False

 

^[14].As the text indicates, a firm's financial risk can and should be divided into separate market and diversifiable risk components.

 

a.True

b.False

 

^[15].If two firms have the same expected earnings per share (EPS) and the same standard deviation of expected EPS, then they must have the same amount of business risk.

 

a.True

b.False

 

^[16].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.

 

a.True

b.False

 

^[17].According to Modigliani and Miller (MM), in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

 

a.True

b.False

 

^[18].According to Modigliani and Miller (MM), in a world with corporate income taxes the optimal capital structure calls for approximately 100% debt financing.

 

a.True

b.False

 

^[19].According to Modigliani and Miller (MM), in a world without corporate income taxes the use of debt has no effect on the firm's value.

 

a.True

b.False

^[20].Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no effect on a firm's value.  However, that article was criticized because it assumed that no taxes existed.  MM then revised their original article to include corporate taxes, and this model led to the conclusion that a firm's value would be maximized if it used (almost) 100% debt.

 

a.True

b.False