MM Proposition I with Taxes Is Based on the Concept

question 74

Multiple Choice

MM Proposition I with taxes is based on the concept that:

• A)the optimal capital structure is the one that is totally financed with equity.
• B)the capital structure of the firm does not matter because investors can use homemade leverage.
• C)the firm is better off with debt based on the weighted average cost of capital.
• D)the value of the firm increases as total debt increases because of the interest tax shield.
• E)the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Cost of Goods Sold

Direct costs attributable to the production of the goods sold by a company, including materials and labor costs.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations, calculated as current assets divided by current liabilities.

Financial Information

Data that pertains to the financial status, performance, and changes in the economic resources of an entity.

Debt to Equity

A financial metric that shows the comparative amount of debt and shareholders' equity utilized to fund a company's assets.