Question
1. Based on M&M with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of their firm? (5
1. Based on M&M with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of their firm? (5 marks) 2. Your study group comprises of five members: John, Mary, Connor, Laurel and Christopher. They have been studying for an upcoming end-of-term exam. As a part of their preparation, they use session themes. Each member of the study group provides a catch-phrase related to the theme around which they hold a discussion to sift the best argument. Currently the theme that they are working with is: Theories about Investors dividend preferences.
The following catch-phrases are provided by the team members: John: The homemade dividend strategy argues that investors impose their dividend preference on the firm. Mary: The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio. Connor: A company can always increase its stock price by increasing its dividend payout ratio. Laurel: An increase in a firm's inclination to pay dividends may be because of a decline in profitable investment opportunities in the future. Christopher: Relevant or not, frequent changes in dividend policy can harm a firm.
As a leader of this study group, you are required to indicate both the right and wrong arguments with suitable reasons. (10 marks)
3. Imagine an American MNC. Why it might decide to borrow in a country such as Brazil, where interest rates are high, rather than a country like Germany, where interest rates are low? Discuss why this may be the best strategy for the firm, given your understanding of the relationship among inflation, interest rates and exchange rate. (5 marks)
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