4. CapitalStructure

Modigliani — Quiz

Test your understanding of modigliani with 5 practice questions.

Practice Questions

Question 1

According to Modigliani-Miller (MM) Proposition I without taxes, what is the relationship between the value of a levered firm ($V_L$) and the value of an unlevered firm ($V_U$)?

Question 2

Which of the following is NOT an assumption of Modigliani-Miller (MM) Proposition I without taxes?

Question 3

Under Modigliani-Miller (MM) Proposition II without taxes, what is the primary reason that the cost of equity ($R_E$) increases as the firm's financial leverage increases?

Question 4

What is the primary implication of Modigliani-Miller (MM) Proposition I with corporate taxes regarding the optimal capital structure?

Question 5

Consider a firm with an unlevered cost of equity ($R_0$) of 11%, a cost of debt ($R_D$) of 6%, a debt-to-equity ratio ($D/E$) of 0.8, and a corporate tax rate ($T_C$) of 35%. What is its cost of equity ($R_E$) according to MM Proposition II with taxes?