True or False? Explain briefly. a If firms did not have limited liability, the risk of
True or False? Explain briefly.
a If firms did not have limited liability, the risk of
their assets would be increased.
b If firms did not have limited liability, the risk of their equity would be increased.
c Borrowing does not affect the return on equity if the return on the firm’s assets is equal to the interest rate.
d As long as the firm is certain that the return on assets will be higher than the interest rate, an issue of debt makes the shareholders better off.
e In a perfect capital market, minimizing the weighted average cost of capital is equivalent to maximizing the firm’s value.
f MM’s proposition II assumes increase borrowing does not affect the interest rate on the firm’s debt.
g Shareholders demand and deserve higher expected rates of return than
bondholders do. Therefore, debt is the cheaper capital source. We can reduce the
WACC by borrowing more.
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