Please say whether each of the following statements is true or false. For each statement, please explain the reason for the statement in one or two sentences. All answers are worth the same number of marks.
1. In a Modigliani and Miller world with corporate taxation, the cost of capital is decreasing in the debt to equity ratio. Debt to equity ratio.
2. 2. In a Modigliani and Miller world without taxation, dividends should only be paid if the company has free cash flow.
3. 3. The covenants of corporate bonds are a way for bondholders to protect their investments from moral hazard.
4. 4. Most of the returns generated by private equity investments tend to accrue to the shareholders of the target company. shareholders of the target company.
5. 5. In incentive-compatible contracts, the share of profits given to the agent is decreasing in the intensity of the conflict of interest between the principal and the agent.
6. 6. The cost of capital of a firm is increasing in the beta of its stock, given a constant capital structure.
7. According to trade-off theory, a firm with uncertain cash flows can take on more debt.
8. 8. In a Modigliani-Miller world without taxes, firms always prefer to pay dividends rather than make share buybacks