4. True or False? Explain briefly.

a. Stockholders always benefit from an increase in company value.

b. MMs proposition I assumes that actions which maximize firm value also maximize shareholder wealth.

c. The reason that borrowing increases equity risk is because it increases the probability of bankruptcy.

d. If firms did not have limited liability, the risk of their assets would be increased.

e. If firms did not have limited liability, the risk of their equity would be increased.

f. Borrowing does not affect the return on equity if the return on the firms assets is equal to the interest rate.

g. As long as the firm is certain that the return on assets will be higher than the interest rate, an issue of debt makes the shareholders better off.

h. MMs proposition I implies that an issue of debt increases expected earnings per share and leads to an offsetting fall in the priceearnings ratio.

i. MMs proposition II assumes increase borrowing does not affect the interest rate on the firms debt.

j. Borrowing increase firm value if there is a clientele of investors with a reason to prefer debt.