Question 3The two key insights that are central to the Miller and Modigliani (MM) theorem are: ____________ and the effect of corporate taxes.1 pointLeveraged firms are more valuablePerfect market efficiencyDebt is cheaper than equityInterest on debt is tax deductible

7.Which of the following statements best describes Modigliani and Miller (MM) Proposition II for a firm that pays corporate taxes? a.The cost of equity increases linearly as the debt-to-equity ratio increases, unaffected by corporate taxes. b.The value of a leveraged firm is equal to the value of an unleveraged firm plus the tax shield benefits of debt. c.The capital structure is irrelevant to the firm's value, even when corporate taxes are considered. d.The firm's cost of capital increases as the debt-to-equity ratio increases, due to the tax deductibility of interest payments. e.Corporate taxes decrease the overall cost of debt, making equity financing more attractive

Modigliani-Miller propositions I and II support which of the following conclusion(s)?Select one or more alternatives:The total value of a firm is irrelevant to its capital structure if tax is considered.The cost of debt is usually lower than the cost of equity because equity holders need to pay taxes.Equity beta increases with debt financing level, but asset beta does not change regardless of capital structure.The cost of equity of a levered firm increases because there is additional compensation for insolvency risk arising from debt.In a perfect capital market, the weighted average cost of capital decreases because interest is tax deductible.

Question 5Miller and Modigliani’s nobel prize winning framework provides all of the following insights, except:1 pointGiven efficient markets, cheaper debt is offset by more expensive equity so that the firm’s overall cost of capital remains unchanged. This implies the value of the firm is unchanged.Given efficient markets, increasing cash flows increases the value of the firmWhen firms pay corporate taxes, the value of the firm can increase due to the interest tax shieldWhen firms pay corporate taxes, the firm’s cost of capital decreasesThe firm can identify a range of capital structures to help determine its target debt ratio

The Modigliani-Miller (MM) model states that, under certain assumptions, the value of a firm is:a.Dependent on its capital structureb.Independent of its capital structurec.Directly proportional to its earnings per share (EPS)d.Inversely proportional to its weighted average cost of capital (WACC)

Explain the relevance of Modigliani-Miller Propositions I and II in capital structure decisions.