Which of the Following Statements Concerning Capital Structure Theory Is

question 2

Multiple Choice

Which of the following statements concerning capital structure theory is INCORRECT?

• A) The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.
• B) Under MM with zero taxes, financial leverage has no effect on a firm's value.
• C) 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.
• D) Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.

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Definitions:

Long Run

A period in economics during which all factors of production and costs are variable, allowing for full adjustment to change, such as new technology or market conditions.

Profit

The financial gain obtained when the revenues generated from business activities exceed the expenses, costs, and taxes involved in sustaining the activities.

Loss

An economic condition where expenses exceed revenues, indicating negative financial performance.

Profit-Maximizing

A strategy or process by which a firm determines the price and output level that returns the greatest profit.