In a World Without Taxes, M&M Proposition I Contends That

question 223

Multiple Choice

In a world without taxes, M&M Proposition I contends that:

• A) The cost of equity is dependent upon the debt-ratio of the firm.
• B) A firm's cost of equity varies with its cost of debt.
• C) The total value of the firm remains constant regardless of the debt-equity mixture applied.
• D) A firm's WACC also determines its cost of equity.
• E) The cost of capital is a linear function with a positive slope.

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Definitions:

Compounded Nominal

Refers to the nominal interest rate which is compounded at certain intervals over a specified period but not necessarily reflecting the actual annual rate of return.

Annuity

An annuity is a financial instrument that provides a consistent series of payments to a person, often serving as a source of income for those who have retired.

Annuitant

The individual entitled to receive payments from an annuity contract, usually during retirement.

Annually Compounded

A compound interest calculation where the interest is added to the principal at the end of each year.