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:

Historical Rate

An exchange rate used to convert amounts related to transactions in foreign currencies based on the rate in effect at the time of the original transaction.

Closing Rate

Closing Rate refers to the exchange rate between two currencies at the end of a trading period, used in accounting to convert the financial statements of foreign subsidiaries.

Spot Rate

The current market price at which a particular currency can be bought or sold for immediate delivery.

Forward Rate

The agreed-upon exchange rate for a currency transaction that will occur at a future date, used as a hedging instrument against currency fluctuations.