Which of the Following Statements Concerning the Compressed Adjusted Present

question 31

Multiple Choice

Which of the following statements concerning the compressed adjusted present value (APV) model 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 in the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions.
• C) For a given D/S, the WACC in the compressed APV model 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.

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Definitions:

Prospectus

A document required that describes the current status of a business and its future prospects.

Over-subscription

A situation where the demand for a company's new share offering exceeds the available supply.

AASB 101

Denotes the Australian Accounting Standards Board Standard 101, prescribing the basis for presentation of general purpose financial statements to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities.

Equity

Equity represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off.