In a Two- Person Firm Where Both People Are Equally

question 12

Multiple Choice

In a two- person firm where both people are equally skilled, their collective income is most likely to be:

• A)approximately twice their income in two one- person firms.
• B)exactly twice their income in two one- person firms.
• C)more than twice their income in two one- person firms.
• D)less than twice their income in two one- person firms.

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Definitions:

Financial Distress

A condition in which a company cannot generate the revenues or income necessary to meet its financial obligations, which may lead to bankruptcy.

MM Propositions

The Modigliani-Miller propositions, which are foundational theorems in corporate finance, asserting that under certain conditions, the value of a firm is unaffected by its capital structure.

Optimal Capital Structure

The best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital.

Leverage

The use of borrowed funds with the aim to increase the potential return of an investment.