M&A, Restructuring & L.B.O. Theorem of Neutrality Quiz
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Questions and Answers

According to the Modigliani-Miller theorem, how does the choice of financing structure affect the value of a company?

  • The value of the company is affected by the choice of financing structure, but only in the presence of taxes.
  • The value of the company is not affected by the choice of financing structure. (correct)
  • The value of the company is affected by the choice of financing structure, but only in the presence of transaction costs.
  • The value of the company is affected by the choice of financing structure.

    • According to the Modigliani-Miller theorem, how does dividend policy affect the value of a company?

  • Dividend policy cannot influence the value of the company, as shareholders are indifferent between receiving dividends or capital gains. (correct)
  • Dividend policy can influence the value of the company, as shareholders prefer dividends over capital gains.
  • Dividend policy can influence the value of the company by affecting its investment policy.
  • Dividend policy cannot influence the value of the company, as it does not affect its investment policy.

    • Why do activists ask for dividends, according to the Modigliani-Miller theorem?

  • Activists ask for dividends because they believe it will increase the value of the company.
  • Activists ask for dividends because they believe shareholders prefer dividends over capital gains.
  • Activists ask for dividends, even though the Modigliani-Miller theorem states that shareholders are indifferent between dividends and capital gains. (correct)
  • Activists ask for dividends because they believe it will affect the company's investment policy.

    • What are the key assumptions of the Modigliani-Miller theorem?

    <p>The theorem assumes a world without taxes and transaction costs, and with market efficiency.</p> Signup and view all the answers

    Who were the co-authors of the Modigliani-Miller theorem?

    <p>Franco Modigliani and Merton Howard Miller.</p> Signup and view all the answers

    What was the key finding of the Modigliani-Miller theorem?

    <p>The value of a company is not affected by its choice of financing structure.</p> Signup and view all the answers

    What is the main assumption of the theorem of neutrality in a perfect capital market?

    <p>The dividend policy and its implementation have no impact on shareholder wealth.</p> Signup and view all the answers

    Which of the following is NOT one of the assumptions of a perfect capital market according to the text?

    <p>Conflicts of interest between managers and shareholders</p> Signup and view all the answers

    What is the key idea behind the 'Goodwill' methods of company valuation?

    <p>The value of the company is equal to its net asset value plus a 'super-profit' or 'goodwill' discounted over a certain period.</p> Signup and view all the answers

    Which type of companies are the 'Goodwill' methods most suitable for?

    <p>Companies with a high level of fixed assets and low profitability.</p> Signup and view all the answers

    What is one of the problems with the 'Goodwill' methods of company valuation?

    <p>It gives a rather low value for high-profit companies.</p> Signup and view all the answers

    Which of the following is NOT one of the assumptions of a perfect capital market mentioned in the text?

    <p>Conflicts of interest (managers / shareholders)</p> Signup and view all the answers

    What is the initial value of one share of Company A?

    <p>$110</p> Signup and view all the answers

    If Company A pays a dividend of $1 million, what is the new value of one share?

    <p>$100</p> Signup and view all the answers

    If Company A issues new shares to raise $1 million, how many new shares will be issued?

    <p>9,091</p> Signup and view all the answers

    If Company A buys back $1 million worth of shares, what is the new total number of shares?

    <p>90,909</p> Signup and view all the answers

    According to the theorem of neutrality, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>It has no impact</p> Signup and view all the answers

    Why do activists ask for dividends, according to the text?

    <p>The text does not provide a clear reason</p> Signup and view all the answers

    What is the UECE method for calculating the value (V) of a company?

    <p>V = NAV + GW = NAV + K (Net profit - iV)</p> Signup and view all the answers

    Which method is known as the 'Anglo-saxon or direct method' for calculating a company's value?

    <p>V = NAV + 1/t (Net profit - i x NAV)</p> Signup and view all the answers

    What is the 'Practitioners method' for calculating a company's value?

    <p>V = ½ (NAV + Net profit / i) = NAV + 1/2i (Net profit - i x NAV)</p> Signup and view all the answers

    If a company has a net asset value of $10,000, a net profit before tax of $1,000, cash of $4,000, a required rate of return (t) of 10%, and a risk-free rate (i) of 4%, what is the value of the company using the UECE method?

    <p>$20,000</p> Signup and view all the answers

    If the company in the previous question distributes a dividend of $4,000, how would the goodwill (GW) be affected?

    <p>GW would decrease</p> Signup and view all the answers

    After distributing a dividend of $4,000, what would be the effect on the company's required rate of return (ROE)?

    <p>ROE would decrease</p> Signup and view all the answers

    Which of the following is NOT an assumption of a perfect capital market according to the text?

    <p>Transaction fees are always present</p> Signup and view all the answers

    According to the theorem of neutrality, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>Dividend policy has no impact on shareholder wealth</p> Signup and view all the answers

    Which type of companies are the 'Goodwill' valuation methods most suitable for?

    <p>Companies with a high level of fixed assets and low profitability</p> Signup and view all the answers

    What is the key idea behind the 'Goodwill' methods of company valuation?

    <p>The value of the company is equal to its net asset value plus a discounted 'super-profit' or 'goodwill'</p> Signup and view all the answers

    What is the main assumption of the theorem of neutrality in a perfect capital market?

    <p>The dividend policy and its implementation have no impact on shareholder wealth</p> Signup and view all the answers

    According to the theorem of neutrality, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>It has no impact on shareholder wealth</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, how does the choice of financing structure affect the value of a company?

    <p>The choice of financing structure has no impact on the company's value</p> Signup and view all the answers

    Which of the following is NOT an assumption of a perfect capital market according to the text?

    <p>Investors have different risk preferences</p> Signup and view all the answers

    What was the key finding of the Modigliani-Miller theorem?

    <p>The dividend policy and financing structure have no impact on a company's value</p> Signup and view all the answers

    Which of the following is a key assumption of the Modigliani-Miller theorem?

    <p>No transaction costs</p> Signup and view all the answers

    Which type of companies are the 'Goodwill' methods most suitable for valuing?

    <p>Companies with intangible assets and intellectual property</p> Signup and view all the answers

    Why do activists ask for dividends despite the theorem of neutrality?

    <p>The text does not provide a reason</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>Dividend policy has no effect on shareholder wealth</p> Signup and view all the answers

    Which of the following is NOT an assumption of the Modigliani-Miller theorem for a perfect capital market?

    <p>Inefficient markets</p> Signup and view all the answers

    Why do activists ask for dividends, according to the text?

    <p>The text does not provide a clear reason</p> Signup and view all the answers

    What is the key idea behind the 'Goodwill' methods of company valuation?

    <p>Valuing a company based on its intangible assets and reputation</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, how does the choice of financing structure affect the value of a company in a perfect capital market?

    <p>It does not affect the company's value</p> Signup and view all the answers

    Which of the following statements best summarizes the Modigliani-Miller theorem?

    <p>In a perfect capital market, the value of a company is determined by its investment policy, not its financing structure or dividend policy.</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, what is the impact of dividend policy on the value of a company in a perfect capital market?

    <p>Dividend policy has no impact on the value of the company.</p> Signup and view all the answers

    What is a key assumption of the Modigliani-Miller theorem for a perfect capital market?

    <p>There are no taxes or transaction costs.</p> Signup and view all the answers

    According to the theorem of neutrality, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>Dividend policy has no impact on shareholder wealth.</p> Signup and view all the answers

    Why do activists ask for dividends, according to the text?

    <p>The text does not provide an explanation for why activists ask for dividends.</p> Signup and view all the answers

    What is the key idea behind the 'Goodwill' methods of company valuation?

    <p>Goodwill methods calculate the value of a company's intangible assets.</p> Signup and view all the answers

    Which of the following is a key assumption of the Modigliani-Miller theorem?

    <p>There are no taxes or transaction costs.</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, which of the following statements is true regarding the value of a company in a perfect capital market?

    <p>The value is independent of the choice of financing structure.</p> Signup and view all the answers

    Which of the following is NOT an assumption of the Modigliani-Miller theorem for a perfect capital market?

    <p>Market inefficiency</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>Dividend policy has no impact on shareholder wealth.</p> Signup and view all the answers

    Why do activists ask for dividends despite the theorem of neutrality?

    <p>The text does not provide a reason for why activists ask for dividends.</p> Signup and view all the answers

    Which of the following statements best summarizes the Modigliani-Miller theorem?

    <p>In a world without taxes, exempt from transaction costs, and under the assumption of market efficiency, the value of economic assets is not affected by the choice of financing structure.</p> Signup and view all the answers

    Which of the following is a key assumption of the Modigliani-Miller theorem?

    <p>Absence of transaction costs</p> Signup and view all the answers

    According to the theorem of neutrality, what is the impact of dividend policy on shareholder wealth in a perfect capital market?

    <p>Dividend policy has no impact on shareholder wealth</p> Signup and view all the answers

    Which of the following is NOT an assumption of a perfect capital market according to the text?

    <p>Managers and shareholders have perfect information</p> Signup and view all the answers

    Which type of companies are the 'Goodwill' methods most suitable for valuing?

    <p>Companies with a high level of fixed assets and low profitability</p> Signup and view all the answers

    What is one of the problems with the 'Goodwill' methods of company valuation?

    <p>It gives a rather low value for high-profit companies</p> Signup and view all the answers

    According to the Modigliani-Miller theorem, how does the choice of financing structure affect the value of a company in a perfect capital market?

    <p>The choice of financing structure has no impact on the value of the company</p> Signup and view all the answers

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