Question 161 pts

Assume that Pinder Ltd operates in a world under the assumptions of Modigliani and Miller. Pinder Ltd has no debt, has 1 million shares outstanding that are trading for $2 per share. Sean, Pinder Ltd's CFO, suggests that the company borrow money to repurchase shares. This way, the rate of return on equity will be higher as long as the rate of return on assets is greater than the cost of borrowing. Sean proposes that the company borrow $0.45 million to repurchase 0.225 million shares. Mary, the CEO of Pinder Ltd, points out that if shareholders borrow on their own, the overall effect will be the same. Since Mary is the CEO, Sean's proposal does not pass. Susan, who holds 3 shares in Pinder Ltd, likes Sean's idea and decides to borrow money to invest in additional shares of Pinder Ltd so that her investment outcome is identical to Sean's proposal. Assume that it is possible to buy fractional shares if necessary. Which of the following values is closest to the amount that Susan will borrow?

Group of answer choices

$2.74

$3.24

$2.24

$1.74

$3.74

Flag question: Question 17

Question 171 pts

Which of the following statements best describe the trade-off theory of capital structure?

Group of answer choices

The shareholders bear the expected bankruptcy costs for the firm.

None of the other statements is correct.

More than one of the other statements is correct.

Firms should increase debt until the marginal benefit of tax savings equal the marginal cost of bankruptcy costs.

Trade-off theory does not suggest that there is an optimal capital structure.

Flag question: Question 18

Question 181 pts

Which of the following statements best describe how capital structure can affect the firm through underinvestment?

Group of answer choices

None of the other statements is correct.

Shareholders will be willing to contribute additional capital to the firm if there are positive NPV projects.

Firms close to bankruptcy will not find it difficult to fund positive NPV projects, as long as the project has a positive NPV.

Underinvestment can occur when gains from a positive NPV project accrue mostly to lenders when the firm is close to bankruptcy.

More than one of the other statements is correct.

Flag question: Question 19

Question 191 pts

Assume that a firm has a cost of debt capital of 0.06, a company tax rate of 0.3, a market value of debt of $14 million, a cost of equity capital of 0.12, and a market value of equity of $10 million. Also assume that the proportion of company taxes claimed by shareholders is 0.6. Which of the following values is the closest to this firm's weighted average cost of capital?

Group of answer choices

0.081

0.101

0.071

0.091

0.111

Flag question: Question 20

Question 201 pts

Which of the following statements best describe the Modigliani and Miller's proposition 2?

Group of answer choices

More than one of the other statements is correct.

Since the cost of debt is usually lower than the cost of equity, adding leverage to the firm will lower the weighted average cost of capital.

None of the other statements is correct.

Even if we assume that the cost of debt increases with the debt to equity ratio, the weighted average cost of capital will stay constant.

The cost of equity will stay constant regardless of the firm's debt to equity ratio.