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

question 76

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) capital structure is irrelevant because investors and companies have differing tax rates.
• C) WACC is unaffected by a change in the company's capital structure.
• D) the value of a taxable company increases as the level of debt increases.
• E) the cost of equity increases as the debt-equity ratio increases.

---

Definitions:

Sales

Sales pertain to the revenue a company generates through the selling of goods or services to its customers.

Minimum Required Rate Of Return

The lowest acceptable return on an investment, determined by the investor's risk tolerance and alternative investment options.

Unit Selling Price

The amount of money charged to the customer for a single unit of product or service.

Unit Variable Cost

The variable cost associated with the production of one unit of a product or service.