Advance Corporate Finance

FIN 540 – Homework Chapter 21 
© 2013 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. FIN 540 Homework Chapter 21 
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Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment. 
1. The major contribution of the Miller model is that it demonstrates that a. personal taxes decrease the value of using corporate debt. b. financial distress and agency costs reduce the value of using corporate debt. c. equity costs increase with financial leverage. d. debt costs increase with financial leverage. e. personal taxes increase the value of using corporate debt. 
2. Which of the following statements concerning capital structure theory is NOT CORRECT? a. Under MM with zero taxes, financial leverage has no effect on a firm’s value. b. Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. c. Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing. d. Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU. e. The major contribution of Miller’s theory is that it demonstrates that personal taxes decrease the value of using corporate debt. 
3. Which of the following statements concerning the MM extension with growth is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions. c. For a given D/S, the WACC is less than the WACC under MM’s original (with tax) assumptions. d. The total value of the firm increases with the amount of debt. e. The tax shields should be discounted at the unlevered cost of equity. 
4. Which of the following statements concerning the MM extension with growth is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions. c. For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions. d. The total value of the firm increases with the amount of debt. e. The tax shields should be discounted at the cost of debt. 
 FIN 540 – Homework Chapter 21 
© 2013 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. FIN 540 Homework Chapter 21 
   Page 2 of 2 
  
5. Which of the following statements concerning the MM extension with growth is NOT CORRECT? a. The value of a growing tax shield is greater than the value of a constant tax shield. b. For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions. c. For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions. d. The total value of the firm is independent of the amount of debt it uses. e. The tax shields should be discounted at the unlevered cost of equity