Quiz Ch 13 – T/F Financial Leverage and Borrowing
Fundamentals of Financial Management, Concise
Brigham and Houston
09th Edition
True or false: The act of borrowing money by a firm constitutes the utilization of financial leverage.
True or false: The act of borrowing money by a firm constitutes the utilization of financial leverage.
True or false: Maintaining all other factors constant, an upsurge in financial leverage will elevate a firm’s market (or systematic) risk, quantified by its beta coefficient.
True or false: The business risk of a firm is significantly shaped by its industry’s financial attributes, particularly the level of debt employed by the average company in the industry.
True or false: Unless excessive debt is employed, operating leverage mainly impacts EPS, whereas financial leverage affects both EPS and EBIT.
True or false: The Miller model integrates personal taxes and builds upon the Modigliani and Miller (MM) model without corporate taxes.
True or false: In a tax-free environment, Modigliani and Miller (MM) demonstrate that a firm’s value remains unaffected by its capital structure. However, when taxes are introduced, MM illustrates a direct correlation between debt and value. Specifically, the firm’s value increases with higher debt usage, assuming other factors remain consistent.
True or false: Modigliani and Miller’s second article, considering corporate taxes, concluded that nearly 100% debt maximizes firm value and minimizes the cost of capital. Bankruptcy costs were omitted. Bankruptcy costs lead to an optimal structure with a debt ratio of less than 100%.
True or false: Modigliani and Miller (MM) received Nobel Prizes for their contributions to capital structure theory.
True or false: As per Modigliani and Miller (MM), in a world devoid of corporate income taxes, the employment of debt does not influence the firm’s value.
True or false: In their second article, Modigliani and Miller (MM) considered taxes, bankruptcy, and disregarded factors from their initial article. Upon integrating these elements, they deduced that each firm possesses a distinct optimal capital structure. Furthermore, the second MM model aids managers in ascertaining their firm’s optimal debt ratio.