Which of the Following Statements Concerning Capital Structure Theory Is

question 18

Multiple Choice

Which of the following statements concerning capital structure theory is NOT CORRECT?

• A) Under MM with zero taxes, financial leverage has no effect on a firm's value.
• B) Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
• C) Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
• D) Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.
• E) The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

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