Question: 13. Answer the following questions. (a) How do bond covenants affect the costs of borrowing? (1 mark) (b)Modigliani and Miller argue that a firm's dividend

13. Answer the following questions.

(a) How do bond covenants affect the costs of borrowing? (1 mark)

(b)Modigliani and Miller argue that a firm's dividend policy does not affect the value of the firmif thecapital market is perfect. Why?(1 mark)

(c) What is the main problem with the regular dividend policy from a firm's point of view? What is themain problem with a constant pay-out ratio dividend policy from a shareholder's point of view? (1 mark)

(d) Do you agree with the following statement? Why or why not? (1 mark)

"The total value of a firm is equal to the market value of the total cash flows generated by its assetsina perfect capital market. If the dividend policy remains unchanged, increased leverage can affectthe total value of the firm.

(e) Suppose you want to purchase shares of TFC, Inc. Would you prefer shares of commonstockorshares of peferred stock? What should you consider before determining the typeof shareyou shouldpurchase? (1 mark)

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