1. According to the M&M propositions, in a perfect market which of the following statements is true?
a. value of the firm will be equal to the net present value of its underlying projects
b. net present value of a firm's projects will be higher if they are financed with debt since debt carries a lower cost
c. net present value of a firm's projects should exceed the present value of the firm's issued claim
d. value of the firm is higher when financed with debt due to its lower cost
Please also check and see if these answers make sense:
2. Which of the following statements is (are) false?
If the market portfolio is the tangency portfolio, then the relationship between risk and return is best described as linear. (D)
3. Which of the following comparisons of the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing (APT) is (are) true?
CAPM bases the expected return on an asset on one “factor” – the market portfolio, the APT bases the expected return on a number of economic factors.
4. Which of the following statements is false?
Managers will make decisions that favor either bondholders or shareholders, depending on which serves their own best interests at the time. (B)
5. The M&M dividend proposition states that:
Shareholder value is unaffected by a firm’s dividend policy.
6. According to Modigliani and Miller, in a perfect market the total value of the firm will be:
The same regardless of the firm’s choice of capital structure.