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1. An election is being held to fill three seats on the board of director of a firm in which you hold stock. The company has 7,600 shares outstanding. If the election is conducted under cumulative voting and you own 300 shares, how many more shares must you buy to be assured of earning at seat on the board?
2. List the three assumptions that lie behind the Modigliani-Miller theory in a world without taxes. Are these assumptions reasonable in the real world? Explain.
3. How would you answer in the following debate?
Q. Isn’t it true that the riskiness of a firm’s equity will rise if the firm increases its use of debt financing?
A. Yes, that’s the essence for MM proposition II
Q. And isn’t true that, as a firm increases it’s used of borrowing the likelihood of default increases, thereby increasing the risk of the firm’s debt?
A. Yes
Q. in other words, increased borrowing increases the risk of the equity and the debt?
A. That’s right
Q. well,given that the firm uses only debt and equity financing, and giving that the
risks of both are increased by increased borrowing, does it no follow that
increasing debt increased the overall risk of the firm and therefore decrease
the value for the firm?
A ?
4. What is homemade leverage?
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