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:

Opportunity Cost

The value of the next best alternative foregone as the result of making a decision, representing the benefits an individual, investor, or business misses out on when choosing one alternative over another.

Leisure

Leisure refers to the time spent away from work, business, or compulsory activities, allowing for rest, recreation, or personal interests and activities.

Higher Wage

A wage level that is above the average or norm, often reflective of high skill levels, demand for specific labor, or union negotiations.

Income Effect

The change in the quantity of a good consumed that results from the change in a consumer’s purchasing power due to the change in the price of the good.