Explain how Propositions I and II are different and how they are similar.
Answer to relevant QuestionsWhat is the difference between levered and unlevered equity? What effect does substituting debt for equity have on the required return on (levered) equity? Suppose commercial bank experiences losses on some of its loans. As a result, it approaches bankruptcy. What kinds of asset-substitution problems may arise? What factors should a manager consider when negotiating the covenants in a long- term debt agreement? What elements must be included in a lease in order for it to be considered a financial (capital) lease? Managers of slow- growing, but profitable, firms (i. e., tobacco companies) should pay out these high earnings as dividends. What can they choose to do instead?
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