M&M Proposition I with Taxes Is Based on the Concept

question 224

Multiple Choice

M&M 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:

Transportation

In geology, the movement of sediments from one location to another by water, wind, or ice.

Pebble's Particle Size

The measure of the grain size of pebbles, generally used in geology to classify sediment grains between 2 and 64 millimeters in diameter.

Increases

An upward trend or a rise in quantity, size, number, or degree in a measurable process or variable.

Easily Weathered

Referring to materials or minerals that break down or decompose quickly when exposed to weathering processes such as rain, wind, or temperature changes.