Which One of the Following Statements Is True

question 205

Multiple Choice

Which one of the following statements is true?

• A) The total value of a firm decreases as debt is initially added to an all equity firm, if taxes are considered.
• B) The tax shield applies to both debt and equity financing.
• C) The ideal capital structure minimizes the total tax liability.
• D) Capital structure does matter when taxes are included.
• E) The general conclusions of M&M Proposition II do not hold when taxes are considered.

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Definitions:

Ownership

The act, state, or right of possessing something.

Control

The exercise of authoritative or regulatory influence over something or someone to guide or manage operations and behaviors.

Moral Hazard

A situation in which one party is more likely to take risks because they do not bear the full consequences of their actions, often due to asymmetrical information or misaligned incentives.

Economic Inefficiency

A situation in which resources are not allocated optimally, leading to wastage or less than maximum output.