M&M Proposition I with No Tax Supports the Argument That

question 378

Multiple Choice

M&M Proposition I with no tax supports the argument that:

• A) Business risk determines the return on assets.
• B) The cost of equity rises as leverage rises.
• C) It is completely irrelevant how a firm arranges its finances.
• D) A firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
• E) Financial risk is determined by the debt-equity ratio.

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Definitions:

Classical Macroeconomic Theory

An economic theory that emphasizes the self-regulating nature of markets and the natural adjustments of markets to achieve full employment equilibrium.

Flexible Interest Rate

refers to an interest rate that can change over the term of a loan or deposit based on market conditions.

Credit Supplied

The total amount of credit available to borrowers from lenders within the market.

Aggregate Demand Curve

A graphical representation that shows the total amount of goods and services demanded at different price levels in an economy.