5. Answer the question based on the framework of Modigliani and Miller Propositions.

   In a world with no transaction costs, and no bankruptcy costs, moderate borrowing will not increase the required return on a firms equity (i.e., the firms cost of equity capital).

   The statement is __________________. A) true B) false C) uncertain

6. Based on the concept of the clientele effect, which one of these combinations correctly aligns an investor group with its preferred type of stocks? A) low-tax-bracket individuals; zero-to-low dividend payout stocks B) high-tax-bracket individuals; high dividend payout stocks

   C) corporations; zero-to-low dividend payout stocks D) tax-free institutions; medium dividend payout stocks

7. Which one of these statements is true? Ignore transaction costs, taxes, signaling effects and other imperfections in answering this question.

   1. A) Shareholders are unable to personally adjust the dividend policy set by the firm.

   2. B) According to Modigliani and Miller, a firm should alter its investment policy whenever a

      change is made in its dividend policy.

   3. C) Firms should never give up positive net present value projects to increase dividends.

   4. D) Firms should reject positive net present value projects to increase dividends or buyback

      shares.