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    Saad PDF

    Uploaded by

    Tabish Khan
    The document contains answers to 5 questions. Question 1 contrasts the net operating income (NOI) approach and the Modigliani-Miller (M&M) approach to capital structure theory. Question 2 calculates the value of a company in an M&M world with different levels of debt. Question 3 explains why high growth companies tend to have lower dividend payout ratios than low growth companies. Question 4 discusses how a firm's liquidity and ability to borrow affect its dividend payout ratio. Question 5 asks about the role of venture capital in promoting small and risky businesses.

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    Saad PDF

    Uploaded by

    Tabish Khan
    213 views3 pages
    The document contains answers to 5 questions. Question 1 contrasts the net operating income (NOI) approach and the Modigliani-Miller (M&M) approach to capital structure theory. Question 2 calculates the value of a company in an M&M world with different levels of debt. Question 3 explains why high growth companies tend to have lower dividend payout ratios than low growth companies. Question 4 discusses how a firm's liquidity and ability to borrow affect its dividend payout ratio. Question 5 asks about the role of venture capital in promoting small and risky businesses.

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    The document contains answers to 5 questions. Question 1 contrasts the net operating income (NOI) approach and the Modigliani-Miller (M&M) approach to capital structure theory. Question 2 calculates the value of a company in an M&M world with different levels of debt. Question 3 explains why high growth companies tend to have lower dividend payout ratios than low growth companies. Question 4 discusses how a firm's liquidity and ability to borrow affect its dividend payout ratio. Question 5 asks about the role of venture capital in promoting small and risky businesses.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    213 views3 pages

    Saad PDF

    Uploaded by

    Tabish Khan
    The document contains answers to 5 questions. Question 1 contrasts the net operating income (NOI) approach and the Modigliani-Miller (M&M) approach to capital structure theory. Question 2 calculates the value of a company in an M&M world with different levels of debt. Question 3 explains why high growth companies tend to have lower dividend payout ratios than low growth companies. Question 4 discusses how a firm's liquidity and ability to borrow affect its dividend payout ratio. Question 5 asks about the role of venture capital in promoting small and risky businesses.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Question 1

    Contrast the net operating income (NOI) approach with the Modigliani and Miller (M&M)
    approach to the theory of capital structure.

    ANSWER
    The net operating income (NOI) approach and the Modigliani-Miller (M&M) approach, in the absence
    of taxes, are identical in form. The only difference is that M&M specify the behavioral characteristics
    that cause the average cost of capital to remain constant. M&M provide a set of assumptions necessary
    to show the mechanism of arbitrage equilibrating returns from similar investments.

    Question 2
    Enoch-Arden Corporation has earnings before interest and taxes of $3 million and a 40 percent
    tax rate. It is able to borrow at an interest rate of 14 percent, whereas its equity capitalization rate
    in the absence of borrowing is 18 percent. The earnings of the company are not expected to grow,
    and all earnings are paid out to shareholders in the form of dividends. In the presence of
    corporate but no personal taxes, what is the value of the company in an M&M world with no
    financial leverage? With $4 million in debt? With $7 million in debt?

    ANSWER
    Question 3
    Why do companies with high growth rates tend to have low dividend-payout ratios and companies
    with low growth rates tend to have high dividend-payout ratios?

    ANSWER
    For a company whose growth in assets is great, there typically is a need to finance externally. In
    addition to debt, the equity base must be built up -- either through retention of earnings or the sale of
    common stock. With flotation costs, retention is usually "cheaper," which argues for a low dividend-
    payout ratio. For a slow growing firm, there frequently is a lack of suitable investments, so external
    financing needs are relatively low. Given this situation, the firm is justified in paying out a high
    proportion of its earnings

    Question 4
    From a managerial standpoint, how do a firm’s liquidity and ability to borrow affect its dividend-
    payout ratio?

    ANSWER
    A company with high liquidity and ready access to lines of credit or the public marketplace for new
    securities offerings has financial flexibility. It is likely to be more inclined to pay a dividend, all other
    things the same. There is far less risk of a cash shortfall should things turn bad in contrast to the
    company with little liquidity or ability to borrow.
    Question 5
    Explain venture capital role in promoting small and risky businesses?

    ANSWER

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