M&M Proposition I with Taxes Is Based on the Concept

question 111

Multiple Choice

M&M Proposition I with taxes is based on the concept that:

• A) The optimal capital structure is the one that is totally financed with equity.
• B) The capital structure of the firm does not matter because investors can use homemade leverage.
• C) The firm is better off with debt based on the weighted average cost of capital.
• D) The value of the firm increases as total debt increases because of the interest tax shield.
• E) The cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Confirmation Bias

An inclination towards sourcing, understanding, valuing, and recollecting insights that reinforce one's standing beliefs or presumptions.

Older Workers

Individuals in the workforce who are typically beyond middle age, often defined as being aged 50 or older, bringing experience and skills to their roles.

Factory Foreman

Refers to a person who supervises workers in a factory, ensuring that work is done efficiently, safely, and up to quality standards.

Overconfidence

A cognitive bias characterized by an individual's overestimation of their knowledge, ability, or control over situations.