M&M Proposition I with Tax Implies That The

question 11

Multiple Choice

M&M Proposition I with tax implies that the:

• A) weighted average cost of capital decreases as the debt-equity ratio increases.
• B) value of a company is inversely related to the amount of leverage used by that company.
• C) value of an unlevered company equals the value of a levered company plus the value of the interest tax shield.
• D) cost of capital is the same regardless of the mix of debt and equity used.
• E) cost of equity increases as the debt-equity ratio decreases.

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Definitions:

Private Ownership

The ownership of property and businesses by individuals or corporations rather than by the government or the public as a whole.

Redistribution of Income

The transfer of income and wealth from some individuals to others through a social mechanism such as taxation, charity, welfare, public services, land reform, or monetary policies.

Circular Flow Model

An economic model that depicts the movement of goods, services, and money between households and businesses in an economy.

Consumer Expenditures

The total amount spent by consumers in an economy on goods and services.