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Are the following statements correct? Motivate your answers. a. The firms H and L only differ in… 1 answer below » Are the following statements correct? Motivate your answers. a. The firms H and L only differ in fanancial structure; firm H is 80% debt financed, firm L for 40%, both at the risk free interest rate of 5%. According to the Modigliani-Miller (MM) theory, $1 invested in firm H , and, alternatively, borrowing $2 and investing $3 in equity of firm L, will produce identical cashflows. b. An assets sells for $8, and a company offers to stockholders the right to buy one new share for $7, for every 7 shares that they currently hold. Ignoring taxes, this right is worth more than $0.85. c. View complete question » Are the following statements correct? Motivate your answers. a. The firms H and L only differ in fanancial structure; firm H is 80% debt financed, firm L for 40%, both at the risk free interest rate of 5%. According to the Modigliani-Miller (MM) theory, $1 invested in firm H , and, alternatively, borrowing $2 and investing $3 in equity of firm L, will produce identical cashflows. b. An assets sells for $8, and a company offers to stockholders the right to buy one new share for $7, for every 7 shares that they currently hold. Ignoring taxes, this right is worth more than $0.85. c. According to the pecking order theory, issuing debt is preferred over issuing equity, so companies maximize leverage. d. Investing an equal amount into two projects always has an internal rate of return (IRR) equal to the average IRR of both projects. e. The dividend policy of a company, which is based on Lintner’s model, is to payout dividend in year t equal to 10% of the earnings per share in year t plus 60% of the dividend in year t-1. This implies that their target ratio is 25%. View less » Oct 09 2015 11:39 AM
