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Modigliani and Miller assumed that firms pay out all of their earnings as dividends. Therefore, they theorized that firms do not grow. Firms do grow, however, and as capital structure theory advanced, an extension to the MM model with taxes was developed that incorporated growth.
Indicate whether each of the following statements about MM model and the extension for growth is true or false:
- The value of a growing tax shield is greater than the value of a constant tax shield.
- Using the MM extension for growth, a growing firm's levered cost of equity is less than the levered cost of equity under MM's original (with tax) assumptions.
- In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.
- Using the MM extension for growth, a growing firm's WACC is greater than the WACC under MM's original (with tax) assumptions.
Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements?
Quarles Industries had the following operating results for 2015: sales = $29,500; cost of goods sold = $19,760; depreciation expense = $5,260; interest expense = $2,640; dividends paid = $1,450. At the beginning of the year, net fixed assets were $17..
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A five-year project has an initial fixed asset investment of $320,000, an initial NWC investment of $32,000, and an annual OCF of -$31,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $500 in March 2037, but investors would receive nothing until then. ..
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