Modigliani-Miller Proposition 1

According to Modigliani-Miller Proposition 1, which of the following scenarios would NOT lead to a change in a firm's total market value?

A company is considering a project with an initial investment of $2,000,000. The project is expected to generate cash flows of either $3,000,000 or $1,500,000 next year, with each outcome being equally likely. The risk-free rate is 4%, and the company demands a 12% risk premium for this project. If the company finances the project entirely with equity, what is the maximum price they should be willing to pay for the project?

A firm is evaluating a project with an expected unlevered return of 18%. They are considering financing the project with $800,000 of debt at a cost of 6%. According to MM Proposition 2 without taxes, what would be the expected return on equity if the total value of the levered firm is $2,000,000?

According to Modigliani-Miller Proposition 2 (without taxes), what is the relationship between a firm's debt-to-equity ratio and the cost of its levered equity?

A company with a debt-to-equity ratio of 0.8 is considering a new capital structure that would result in a debt-to-equity ratio of 1.2. According to MM Proposition 2 (without taxes), what must occur to the firm's cost of equity, and why?

Why might an individual investor choose to replicate the effects of leverage on their own, rather than investing in a company that has already implemented leverage?

A firm is financed with both debt and equity. The returns to equity holders are significantly higher than those of unlevered equity. What are the possible outcomes of increasing financial leverage, and why do companies carefully balance debt and equity?

How does systematic risk impact risk premiums for unlevered equity, levered equity, and debt?

Consider a company deciding whether to borrow debt. What is an optimal leverage ratio?

A firm is evaluating a capital structure change that involves increasing its debt-to-equity ratio. According to Modigliani-Miller Proposition 2 (without taxes), what is the MOST LIKELY impact on the firm's weighted average cost of capital (WACC)?

What does research indicate about the characteristics of firms that tend to have higher levels of leverage?

In an efficient market, according to Titman (2002), why would a firm's financing choice be considered irrelevant?

Assuming no other factors are at play, what would happen if two markets are integrated, but exhibit an imbalance?

In the context of Modigliani-Miller (MM) propositions and market efficiency, which statement accurately reflects the interaction between the two?

According to MM Proposition 2, what is the relationship between levered equity's cost of capital and the cost of capital of unlevered equity in a market with no taxes?

How is firm risk measured, and if a company raises more debt, what component of risk directly increases?

Consider a corporation that issues equity and uses the proceeds to repay a substantial amount of debt, significantly reducing its debt-equity ratio. According to perfect capital markets theory, what effect will this capital structure transaction have on the corporation's equity cost of capital and weighted average cost of capital (WACC)?

If a firm has perfect capital markets, what will happen to a firm's equity cost of capital and WACC as it borrows at a low cost of capital for debt?

When analyzing Coca-Cola's balance sheet and a change in its capital structure (buying back debt), what real-world conclusion can be drawn about the impact of such decisions?

How can the effect of leverage on the risk of a firm’s securities be expressed, and what financial ratio provides insights into this risk?

According to MM, what principle implies that any financial transaction that appears to be a good deal may exploit some type of market imperfection?

Under what condition does the WACC of a firm equal its equity cost of capital?

In the context of capital structure, what is the significance of 'asset tangibility,' and how does it typically influence a firm's leverage?

What is the primary argument of Titman (2002) regarding financing choice in the context of Modigliani-Miller (MM) theory?

What actions did firms and financial intermediaries take in response to the imbalance in Hong Kong’s market in the 1980s, and which response proved more efficient?

What is required for MM propositions to hold, and how must markets operate for these propositions to remain valid?

Coca-Cola's capital structure changes impacted both the debt-to-equity ratio and the costs of debt and equity. How does perfect capital markets theory explain the overall effect on WACC?

Given the Conservation of Value Principle for Financial Markets, how do financial transactions typically function in perfect capital markets?

If a firm is entirely equity-financed (unlevered), how does this capital structure affect the relationship between its assets and equity holders under MM propositions?

What is the primary reason it is challenging to definitively prove that $V(L) = V(U)$ in real-world conditions?

How has the issuer of warrants evolved over time in the Hong Kong market, and what does this shift indicate about market efficiency?

According to a visual representation of MM Proposition 2 and WACC, what happens to the cost of debt (Rd) as a company raises a reasonable level of debt?

A firm's equity beta has a positive association with the company's debt-to-equity (D/E) ratio. What does this imply about the systematic risk of the company when it raises more debt?

Debt policy can matter for firm value due to a key underlying factor. Which of the following concepts helps explain why debt policy matters?

A business generates consistent profits annually but opts for less leverage, according to empirical research. Why?

Beta measures systematic risk, which defines the risk type experienced and if a company's beta is 1.5, how would that be systematically defined?

Suppose a firm is considering a capital structure change. According to the Modigliani-Miller Proposition 1, under which condition would changes to the debt-to-equity ratio have NO impact on the firm's total value?

Consider two firms with identical operating incomes and business risk. Firm A is unlevered, while Firm B has a significant amount of debt in its capital structure. Which statement accurately describes how the returns on equity would differ between the two firms, according to MM Proposition 2 without taxes?

A company is evaluating a project that can be financed with either all equity or a mix of debt and equity. If the company chooses to introduce debt into its capital structure, what is the MOST LIKELY impact on the weighted average cost of capital (WACC) in a market with perfect capital markets?

What critical assumption underlies Modigliani-Miller's argument that, in perfect capital markets, homemade leverage can allow investors to achieve the same risk-return profile regardless of a firm's capital structure?

In a market where financial transactions neither add nor destroy value, but merely repackage risk and return, what does the Conservation of Value Principle suggest about any financial transaction that appears to offer unusually high returns?