Financial Management - Study Mode

[#166] Which of the following is / are assumption(s) underlying the Miller and Modigliani analysis?
Correct Answer

(D) All of the above.

Explanation

Solution: Capital markets are perfect, Investors are assumed to be rational and behave accordingly and there is no corporate or personal income tax are the assumptions underlying the Miller and Modigliani analysis.

[#167] The return component that gives periodic cash flows to the investor is known as the______________.
Correct Answer

(C) yield

Explanation

Solution: The return component that gives periodic cash flows to the investor is known as the yield. Yield is the periodic cash flow (or return on investment in the form of interest or dividends).

[#168] The dividend-payout ratio is equal to __________.
Correct Answer

(B) dividends per share divided by earnings per share

Explanation

Solution: The dividend-payout ratio is equal to dividends per share divided by earnings per share.

[#169] Altering the leverage ratio does not influence the market value of the firm. This is the basic premise of _______.
Correct Answer

(D) net operating income approach

Explanation

Solution: Net Operating Income Approach was also suggested by Durand. This approach is of the opposite view of Net Income approach. This approach suggests that the capital structure decision of a firm is irrelevant and that any change in the leverage or debt will not result in a change in the total value of the firm as well as the market price of its shares. This approach also says that the overall cost of capital is independent of the degree of leverage.

[#170] While calculating the weighted average cost of capital, market value weights are preferred because ____________.
Correct Answer

(A) Book value weights are historical in nature

Explanation

Solution: While calculating the weighted average cost of capital, market value weights are preferred because Book value weights are historical in nature.