Which of the Following Statements Concerning the Compressed Adjusted Present

question 14

Multiple Choice

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

• A) The value of a growing tax shield is greater than the value of a constant tax shield.
• B) For a given D/S, the levered cost of equity is greater in the compressed APV model than the levered cost of equity under MM's original (with tax) assumptions.
• C) For a given D/S, the WACC is greater in the compressed APV model than the WACC under MM's original (with tax) assumptions.
• D) The total value of the firm increases with the amount of debt.
• E) The tax shields should be discounted at the cost of debt.

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Definitions:

Sunk Cost

Refers to money that has already been spent and cannot be recovered, which should not influence future business decisions.

Standard Cost Formula

A predetermined cost of manufacturing a single unit or a number of product units during a specific period under normal conditions, used for budgeting and cost control.

Total Cost

The aggregate amount of all costs involved in producing a product or delivering a service, including direct materials, labor, and overhead expenses.

Indirect Manufacturing Cost

Costs in manufacturing that are not directly traceable to individual products, such as maintenance, utilities, and factory supervision.