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Harvard Business School Finance Course With 100% Correct Screen Shots Solutions Of Mentioned Questions

Harvard Business School Finance Course With 100% Correct Screen Shots Solutions Of Mentioned Questions

The cost of debt is generally lower than the cost of equity.

Top of Form

 

True

 

False

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M&M’s Proposition I states that a company’s value is independent of its capital structure.

Top of Form

 

True

 

False

Bottom of Form

 

 

A higher level of leverage generally reduces managerial discretion.

Top of Form

 

True

 

False

Bottom of Form

 

 

 

The Pecking Order Theory of capital structure implies a unique optimum capital structure.

Top of Form

 

True

 

False

Bottom of Form

 

 

 

As EBIT drops, the return on equity (ROE) of a levered firm drops ______ the ROE of an otherwise identical unlevered firm.

Top of Form

 

the same as

 

relatively more than

 

relatively less than

 

more or less than (it cannot be determined)

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Shareholders prefer high risk projects when facing a high probability of bankruptcy because

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High risk projects usually bring high rewards.

 

Shareholders have the residual claim on a company.

 

Creditors have the residual claim on a company, and therefore bear the risk.

 

There is a good chance the government will rescue them in bankruptcy.

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The _________ states that the value of the firm is determined solely by the value of its assets.

Top of Form

 

Static Tradeoff Model

 

M&M proposition I

 

The Pecking Order Model

 

Agency Theory

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Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.]

Top of Form

 

VL = PV(Tax Shield) – PV(CFD)

 

VL = VU + PV(Tax Shield) / PV(CFD)

 

VL = VU + PV(Tax Shield) – PV(CFD)

 

VL = VU + PV(Tax Shield)

Bottom of Form

 

 

 

A example of indirect costs of bankruptcy is

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Court costs

 

Attorney and advisor fees

 

Lost sales due to costumers and suppliers lost trust

 

All of the above

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Which of the following are equivalent under M&M proposition I?

Top of Form

 

Maximizing firm value and maximizing firm profit

 

Maximizing firm value and minimizing the cost of capital

 

Minimizing firm’s cost of capital and minimizing firm’s debt burden

 

Maximizing profit and minimizing taxes

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