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    A manager should attempt to maximize the value of the firm by: A. changing the capital structure if and only if the value of the firm increases. B. changing the capital structure if and only if the

    Answer to: A manager should attempt to maximize the value of the firm by: A. changing the capital structure if and only if the value of the firm...

    Profit maximization

    A manager should attempt to maximize the value of the firm by: A. changing the capital structure...

    A manager should attempt to maximize the value of the firm by: A. changing the capital structure... Question:

    A manager should attempt to maximize the value of the firm by:

    A. changing the capital structure if and only if the value of the firm increases.

    B. changing the capital structure if and only if the value of the firm increases to the benefit of inside management.

    C. changing the capital structure if and only if the value of the firm increases only to the benefits of the debtholders.

    D. changing the capital structure if and only if the value of the firm increases although it decreases the stockholders' value.

    E. changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.

    Value Maximization:

    Value maximization is one of the goals and objectives of an organization. Value of a firm is maximized through the increase of common stock share price that individuals have invested, in order for his net worth to increase.

    Answer and Explanation:

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    Profit Maximization: Definition, Equation & Theory

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    Chapter 24 / Lesson 6

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    Learn the profit maximization definition, its importance, and explore the profit maximization theory. See how to calculate profit maximization with examples.

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    Financial Planning and Capital Structure

    Exams Preparation Group

    Financial Planning and Capital Structure

    The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

    homemade leverage.

    dividend recapture.

    the weighted average cost of capital.

    private debt placement.

    personal offset

    The proposition that the value of the firm is independent of its capital structure is called:

    the capital asset pricing model.

    MM Proposition I.

    MM Proposition II.

    the law of one price.

    the efficient markets hypothesis.

    The proposition that the cost of equity is a positive linear function of capital structure is called:

    the capital asset pricing model.

    MM Proposition I.

    MM Proposition II.

    the law of one price.

    the efficient markets hypothesis.

    The tax savings of the firm derived from the deductibility of interest expense is called the:

    interest tax shield.

    depreciable basis. financing umbrella. current yield.

    tax-loss carryforward savings.

    The unlevered cost of capital is:

    the cost of capital for a firm with no equity in its capital structure.

    the cost of capital for a firm with no debt in its capital structure.

    the interest tax shield times pretax net income.

    the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.

    equal to the profit margin for a firm with some debt in its capital structure.

    The cost of capital for a firm, WACC, in a zero tax environment is:

    equal to the expected earnings divided by market value of the unlevered firm.

    equal to the rate of return for that business risk class.

    equal to the overall rate of return required on the levered firm.

    is constant regardless of the amount of leverage.

    All of the above.

    The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet:

    places assets on the right hand side.

    places liabilities on the left hand side.

    does not equate the right hand with the left hand side.

    lists items in terms of market values, not historical costs.

    uses the market rate of return.

    The firm's capital structure refers to:

    the way a firm invests its assets.

    the amount of capital in the firm.

    the amount of dividends a firm pays.

    the mix of debt and equity used to finance the firm's assets.

    how much cash the firm holds.

    A general rule for managers to follow is to set the firm's capital structure such that:

    the firm's value is minimized.

    the firm's value is maximized.

    the firm's bondholders are made well off.

    the firms suppliers of raw materials are satisfied.

    the firms dividend payout is maximized.

    A levered firm is a company that has:

    Accounts Payable as the only liability on the balance sheet.

    has some debt in the capital structure.

    has all equity in the capital structure.

    All of the above. None of the above.

    A manager should attempt to maximize the value of the firm by:

    changing the capital structure if and only if the value of the firm increases.

    changing the capital structure if and only if the value of the firm increases to the benefits to inside management.

    changing the capital structure if and only if the value of the firm increases only to the benefits the debtholders.

    changing the capital structure if and only if the value of the firm increases although it decreases the stockholders' value.

    changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.

    The effect of financial leverage depends on the operating earnings of the company. Which of the following is not true?

    Below the indifference or break-even point in EBIT the non-levered structure is superior.

    Financial leverage increases the slope of the EPS line.

    Above the indifference or break-even point the increase in EPS for all equity plans is less than debt-equity plans.

    Above the indifference or break-even point the increase in EPS for all equity plans is greater than debt-equity plans.

    The rate of return on operating assets is unaffected by leverage.

    The Modigliani-Miller Proposition I without taxes states:

    a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

    when new projects are added to the firm the firm value is the sum of the old value plus the new.

    managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value.

    the determination of value must consider the timing and risk of the cash flows.

    None of the above.

    MM Proposition I without taxes is used to illustrate:

    the value of an unlevered firm equals that of a levered firm.

    that one capital structure is as good as another.

    leverage does not affect the value of the firm.

    capital structure changes have no effect stockholder's welfare.

    All of the above.

    A key assumption of MM's Proposition I without taxes is:

    that financial leverage increases risk.

    that individuals can borrow on their own account at rates less than the firm.

    that individuals must be able to borrow on their own account at rates equal to the firm.

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    FINA 4001 Exam Three

    Study with Quizlet and memorize flashcards containing terms like Financial leverage impacts the performance of the firm by:, MM Proposition I with taxes supports the theory that:, The firm's capital structure refers to: and more.

    FINA 4001 Exam Three - Chapter 16

    5.0 (1 review) Term 1 / 24

    Financial leverage impacts the performance of the firm by:

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    Definition 1 / 24

    increasing the volatility of the firm's net income.

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    Created by Dunbah

    Terms in this set (24)

    Financial leverage impacts the performance of the firm by:

    increasing the volatility of the firm's net income.

    MM Proposition I with taxes supports the theory that:

    there is a positive linear relationship between the amount of debt in a levered firm and its value.

    The firm's capital structure refers to:

    the mix of debt and equity used to finance the firm's assets.

    When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:

    interest payments on the debt stay fixed, leaving more income to be distributed over less shares.

    The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

    homemade leverage.

    The cost of capital for a firm, R-WACC, in a zero tax environment is (Can pick multiple):

    A.) equal to the rate of return for that business risk class.

    B.) equal to the expected earnings divided by market value of the unlevered firm.

    C.) equal to the overall rate of return required on the levered firm.

    D.) is constant regardless of the amount of leverage.

    All of these

    A key assumption of MM's Proposition I without taxes is:

    that individuals must be able to borrow on their own account at rates equal to the firm.

    The tax savings of the firm derived from the deductibility of interest expense is called the:

    interest tax shield.

    A manager should attempt to maximize the value of the firm by:

    changing the capital structure if and only if the value of the firm increases.

    A general rule for managers to follow is to set the firm's capital structure such that:

    the firm's value is maximized.

    The effect of financial leverage depends on the operating earnings of the company. Which of the following is not true?

    Above the indifference or break-even point the increase in EPS for all equity structures is greater than debt-equity structures.

    The Modigliani-Miller Proposition I without taxes states:

    a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

    MM Proposition I with corporate taxes states that:

    A. capital structure can affect firm value.

    B. by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value.

    C. firm value is maximized at an all debt capital structure.

    D. All of these. E. None of these. D.) All of these

    MM Proposition II is the proposition that:

    a firm's cost of equity capital is a positive linear function of the firm's capital structure.

    -------------------------------

    ...

    How is the "Value of a Firm" defined?

    is defined to be the sum of the value of the firm's debt and the firm's equity

    If the goal of the management of the firm is to make the firm as valuable as possible, the firm should pick the debt-equity ratio that makes the pie what?

    As big as possible

    What are the assumptions of the "Modigliani-Miller Model"?

    -NO TAXES

    -Perfect Capital Markets:

    ..Perfect competitions

    ..firms and investors can borrow/lend at the same time

    ..equal access to all relevant information

    ..no transaction costs

    -No costs of financial stress (bankruptcy)

    If all the assumptions hold, the capital structure of the firm (choice between equity and debt) does not influence what?

    The value of the firm

    For M&M w/ No taxes, what is Proposition I?

    Firm value is not affected by leverage

    VLev = VUnlev

    For M&M w/ No taxes, what is Proposition II?

    Leverage increases the risk and return to stockholders

    Re = Ra + D/E * (Ra - Rd)

    rD is the cost of debt

    rE is the cost of equity

    rA total cost of capital (WACC)

    D is the value of debt

    E is the value of equity

    What does the 2nd proposition tell us?

    We know that Rd < Re since debt is a safer security (debthodlers have priority over shareholders)

    Says that when a firm increase D, Re increases so that WACC (Ra) does not change

    Is the "M&M Model" realistic? If no, why is it still important?

    No, Because it is telling us under what assumptions capital structure does not matter. It creates the foundations of any other capital structure study.

    Now, we can introduce one imperfection at a time (starting with corporate taxes) to see what happens to the model.

    For M&M w/ taxes, what is Proposition I?

    Firm value increases with leverage

    VLev = VUnlev + (Tax)(Debt)

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