In a World with Taxes and fiNancial Distress, When a fiRm

question 18

Multiple Choice

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure: I.the debt-equity ratio will also be optimal.
II) the weighted average cost of capital will be at its minimal point.
III) the required return on assets will be at its maximum point.
IV) the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

• A)I and IV only.
• B)II and III only.
• C)I and II only.
• D)II, III, and IV only.
• E)I, II, and IV only.

Recognize the demographic trends affecting government budget deficits.

Identify the relationship between income levels, tax burdens, and equity in a tax system.

Explain the impact of taxes on economic efficiency and deadweight loss.

Understand the fiscal role of state and local governments versus the federal government.

---

Definitions:

Market Value

The now rate for transactions involving the purchase or sale of assets or services.

Debt

Money borrowed by one party from another, under the condition it will be paid back often with interest, used by individuals, businesses, and governments to finance activities.

Common Stock

Equity ownership in a corporation, with voting rights and potential dividends not guaranteed.

Preferred Stock

A class of ownership in a corporation with a fixed dividend that is paid out before dividends to common shareholders and typically lacks voting rights.