Questions: Responses to essay questions should be a minimum of 230 words.
1. What type of capital structure should a firm choose and why? In you answer, be sure to include capital structure fallacies and their effects on a firm’s decision.
2. Define and discuss MM Proposition I with its implications, and the roles of homemade leverage and the Law of One Price in the development of the proposition.
3. What is leveraged recapitalization and what effects does it have on the value of equity?
4. Define the optimal fraction of debt and the growth rate of a firm. What is the relationship between the two?
Essays:
Responses to essay questions should be a minimum of 250 words, using APA format.
1. Define the three conditions that make up a perfect capital market, and then compare and contrast the effects of perfect capital markets and imperfect capital markets on value. Can they create or destroy value? Explain.
2. Define EBIT and discuss why the optimal level of leverage from a tax-saving perspective is the level at which interest equals EBIT. Does this have a connection with under-leveraging corporations--both domestically and internationally?
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