2-Which of the following statements concerning the MM extension with growth is NOT CORRECT? Possible Answers:
The tax shields should be discounted at the cost of debt. •
The value of a growing tax shield is greater than the value of a constant tax shield. •
For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions. •
For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions. •
The total value of the firm increases with the amount of debt. 10-Which of the following are NOT ways risk management can be used to increase the value of a firm? Possible Answers:
Risk management can increase debt capacity.
Risk management can help a firm maintain its optimal capital budget. •
Risk management can reduce the expected costs of financial distress. •
Risk management can help firms minimize taxes.
Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments. 11-Which of the following statements about project risk analysis in not-for-profit firms is incorrect? Possible Answers:
The market risk of a project is not relevant to not-for-profit firms. •
A project’s corporate beta measures the contribution of the project to the overall corporate risk of the firm. •
A project’s corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio. •
A project’s corporate beta is defined as (σP/σF)rPF, where σP is the standard deviation of the project’s returns, σF is the standard deviation of the firm’s returns, and rPF is the correlation among the two sets of returns. •
In practice, it is usually difficult, if not impossible, to directly measure a project’s corporate risk, so project risk analysis typically focuses on stand-alone risk. 15-Which of the following statements concerning the MM extension with growth is NOT CORRECT? Possible Answers:
The tax shields should...
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