Which of the following statements is false? As long as the firm\'s choice of sec
ID: 2750270 • Letter: W
Question
Which of the following statements is false?
As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise.
If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm.
The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.
An investor who would like more leverage than the firm has chosen can lend to add leverage to his or her own portfolio.
Which of the following statements is false?
While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity.
Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.
We can use Modigliani and Miller's first proposition to derive an explicit relationship between leverage and the equity cost of capital.
According to Modigliani and Miller, the total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.
Which of the following statements is false?
As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise.
If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm.
The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.
An investor who would like more leverage than the firm has chosen can lend to add leverage to his or her own portfolio.
Explanation / Answer
Which of the following statements is false? As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. Fasle The decision of capital structure doesnot depends on the choise of securities If securities are fairly priced, then buying or selling securities has an NPV of zero and, therefore, should not change the value of a firm. False Because even if the securities are fairly priced the NPV will not be zero The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. Fasle Because the amount what he is going to receive now has present value factor 1 but the amont which he has to repay in future needs to find out the future value of the present cash flow An investor who would like more leverage than the firm has chosen can lend to add leverage to his or her own portfolio. True Which of the following statements is false? While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity. TRUE Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation. TRUE MM model is used to find out the diff between the levere and unlevered firm that the cost of capital remains same for botht the firm We can use Modigliani and Miller's first proposition to derive an explicit relationship between leverage and the equity cost of capital. false According to Modigliani and Miller, the total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered. TRUE
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