The Cost of Debt Is Generally Lower Than the Cost

question 202

Multiple Choice

The cost of debt is generally lower than the cost of equity; however, according to __________, replacing equity with debt will not change the value of the firm because the savings attributable to the lower cost of debt financing will be offset by the higher required return on the remaining equity.

• A) M&M Proposition I with taxes.
• B) M&M Proposition I without taxes.
• C) The static theory of capital structure.
• D) M&M Proposition II without taxes.
• E) M&M Proposition II with taxes.

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Definitions:

Adjusting Entry

These are journal entries made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.

Bonds Pay Interest

A statement indicating that bond issuers periodically make interest payments to bondholders.

Semiannually

Refers to an event or action that occurs twice a year.

Sold Bonds

The act of a company or government issuing bonds to investors in exchange for capital, representing a long-term borrowing.