Which of the Following Statements Concerning Capital Structure Theory Is

question 83

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, r_s 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 r_sL is a function of r_sU.
• 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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Definitions:

Corporation

A legal entity owned by shareholders, with rights and liabilities distinct from those of its owners.

Large Business

Generally refers to a corporation or enterprise that operates on a large scale in terms of revenue, employees, or market share, often exceeding the thresholds set for small and medium-sized enterprises.

Insurance Policy

A contract that provides financial protection against losses or damages, defining the terms, coverage, premiums, and conditions under which the insurer will compensate the insured.

Accounting Equation

The fundamental principle of finance stating that assets equal liabilities plus equity.