Cash Flow Assignment

Cash Flow Assignment

Cash Flow Assignment, Suppose that we have an unlevered firm U and a levered firm L, which differ only in terms of the capital structure. Firm L has equity Ej and debt D > 0). Firm U has equity Eu. Suppose the assumptions of M&M theorem holds. Both investors and the firm have the same lending and borrowing rate r. Then answer questions 13 to 16.

10. How many statements below about cash flows are correct? i. The two firms have the same amount of taxation. ii. The two firms have the same cash flow from assets (CFFA). iii. The two firms have the same cash flow to equity holders. iv. The two firms have the same cash flow to creditors.

Your choice: a. one; b. two; c. three; d. four.

11. How many statements below about firm value and cost of capital are correct? i. The levered firm value is E + D, and the unlevered firm value is Ey ii. The levered firm’s value is equal to the unlevered firm’s value. iii. The levered firm’s WACC is equal to the unlevered firm’s WACC. iv. The levered firm’s equity return is different from the unlevered firm’s equity return.

Your choice: a. one; b. two; c. three; d. four.

12. Suppose you want to implement the following two strategies: (1) Buy 10% equity of firm L; (2) Buy 10% equity of firm U, and borrow for an amount 0.1D, (i.e., the same amount as 10% of the levered firm’s debt). Which statement below is wrong?

a. The cost of the two strategies are different.

b. The cost of the first strategy is 0.1E

c. The two strategies generate the same cash flows to you.

d. If the two strategies have different initial costs, then there is an arbitrage opportunity.

e. You create leverage by borrowing for yourself in the second strategy.

13. Suppose we are in the M&M world. For firm X, the cost of equity is 17%, the required return on the assets is 12%, and the debt to equity ratio is 1:2. What is the firm’s cost of equity if the debt-to-equity ratio becomes 1:1 while assets are unchanged?

a. 12% b. 17% c. 20% d. 22% e. 24%

14. Which ones below are correct about the bankruptcy? i. A firm is bankrupt when it is unable to fulfill its debt obligations ii. Equity holders are in control during bankruptcy. iii. Creditors are in control during bankruptcy. iv. The firm is liquidated in a bankruptcy.

Cash Flow AssignmentYour choice: a. i and ii; b. i and iii; c. i, ii, and iv; d. i, iii, iv; e. ii and iv

15. If we introduce positive tax rate to the M&M world, which statement below is incorrect?

a. The cost of equity is above the after-tax cost of debt.

b. As leverage increases, the required rate of return for equity increases.

C. As leverage increases, WACC remains the same.

d. As leverage increases, the after-tax cost of debt remains the same.

e. As leverage increases, the value of the firm increases.

16. Suppose we introduce bankruptcy to the M&M world, which statement below is incorrect?

a. As leverage increases, the probability of bankruptcy increases.

b. As leverage increases, WACC increases.

c. As leverage increases, the value of the firm increases.

d. As leverage increases, the required rate of return for equity increases.

17. The tradeoff theory of capital structure states that:

a. The capital structure of a firm does not matter.

b. The optimal capital structure is the one that is totally financed with equity.

c. WACC increases as the firm’s debt-equity ratio increases.

d. The cost of equity must decrease as the debt-equity ratio of a firm increases.

e. The value of a firm increases with leverage if the tax shield effect is stronger than the bankruptcy effect.

18. How many of the statements about corporate finance and capitalism are correct?

i. A reduction of central bank policy rate increases the number of possible NPV projects, therefore stimulating the economy.

ii. Higher entry barriers into an industry may increase existing firms’ market power and reduced welfare

iii. Efficient capital allocation is an essential part of capitalism.

iv. Proper corporate governance can reduce the conflict of interest between corporate managers and shareholders, therefore improving the efficiency of the system.

Your choice: a. zero; b. one; c. two; d. three; e. four. Get Finance homework help today

Calculate your paper price
Pages (550 words)
Approximate price: -

Why Choose HelpHub


Quality Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.


Qualified Writers

We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.


Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account.


On Time Delivery

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. We will always strive to deliver on time.


Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text.


24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:

How it works?

Follow these simple steps to get your paper done

Help Hub

Place your order

Fill in the order form and provide all details of your assignment.

Help Hub

Proceed with the payment

Choose the payment system that suits you most.

Help Hub

Receive the final file

Once your paper is ready, we will email it to you.

HelpHub Writing Services

No need to work on essay at night. Sleep tight, we will cover your back. We offer all kinds of essay writing services.

HelpHub HelpHub


Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

HelpHub HelpHub


Admission Essays

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

HelpHub HelpHub


Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

HelpHub HelpHub


Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied.