Purchase Solution

MM Prop I

Not what you're looking for?

Ask Custom Question

If the assets are tangible and the market can supply meaningful valuations then you could say that the value of the firm is the assets-in a perfect world. Another approach is to look at the discounted cash flow that the firm generates. Further, if we look at the value of a firm's stock assuming that the market can fairly value the stock (sort of rules out privately held firms) we can see that the price of stock in a highly leveraged firm is less than that of a similar firm with less leverage. The risk of high leverage is captured in a lower price of the stock (return = (CG + Div)/Price) because investors demand a higher return for the higher risk.

What are some of the consequences of high leverage?

Purchase this Solution
Solution Summary

The solution goes into a great amount of detail regarding the question being asked. Step by step explanation is provided for each part of the question which makes it very easy to follow along for anyone with just a basic understanding of the concepts. Overall, an excellent response to the question being asked.

Solution Preview

High leverage can have several consequences to a firm.
1. As stated in the note, high leverage causes the cost of equity to rise. This is because investors perceive the company as risky. With high leverage, the creditors would be the first ...

Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

View More Free Quizzes
Related BrainMass Solutions

  • MM Propositions I and II explained and are they realistic?

    Credit Value MM Proposition I and II M&M Proposition I says that a firm's value doesn't depend on the company's structure of capital. And MM prop.

  • Quadratic Equations and Functions

    You did not define your variable Unless you tell me what the original word problem is, I can't help you define the variable. I suspect in this case it is dimension isn't it? 20.

  • converse of the Pythagorean theorem

    Note that Prop. 48 is the converse of the Pythagorean theorem (Prop. 47) Prop. 47: In right-angled triangles the square on the side opposite the right angle equals the sum of the squares on the sides containing the right angle.

  • Hypothesis Testing of Population Mean: Z Test

    362655 One Sample Tests of Hypothesis: Prop bets at Mirage for Super Bowl Sunday According to news reports, Las Vegas betting parlors increased the number of proposition (prop) bets available to gamblers for this year's Super Bowl (Example: Which team

  • Impact of corporate culture, diversity, and multiculturalism

    This is particularly important for a sole prop. because the sole prop. is generally the smallest form of company that we see (not always, but usually).

  • Writing Propositions & Identifying the Parts

    Identify the quantifier, subject, predicate, and copula in each: Prop: Q: S: C: P: Prop: Q: S: C: P: 1.

  • image distance using a telescope

    198677 Telephoto Using formula 1/f = 1/o + 1/i Find the image distance i for an object that is 2,000,000 mm from a 250-mm telephoto lens here, the focal length f = 250 mm, the distance of the object o = 2000000 mm from th len now we need to find

  • MTH 209 word problem "Lens Equation "

    Use this formula to find the image distance i for an object that is 2,000,000 mm from a 250-mm telephoto lens.

  • MM Proposition

    MM Proposition I that leverage is invariant to market value. MM Proposition II that the cost of equity is always constant. MM Proposition I that the market value of the firm is invariant to the capital structure.

  • Circumference versus diameter calculation of slope

    I then needed to graph these, show a line of regression and calculate the slope. I am a little lost on whether I did the firt part correct and then need some clarification on what the second two questions are actually asking.

View More Related Solutions