Based on M&M Proposition I with Taxes, the Weighted Average

question 52

Multiple Choice

Based on M&M Proposition I with taxes, the weighted average cost of capital:

• A) is equal to the aftertax cost of debt.
• B) has a linear relationship with the cost of equity capital.
• C) is unaffected by the tax rate.
• D) decreases as the debt-equity ratio increases.
• E) is equal to RU(1 − TC).

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Definitions:

Marginal Tax Rate

The percentage of tax applied to your income for each additional dollar of income.

Average Tax Rate

The proportion of total income that is paid in taxes, calculated by dividing the total taxes paid by the total income.

Income

Cash inflow, regularly obtained, as compensation for work or earnings from invested capital.

Average Tax Rate

The average tax rate is the proportion of total taxable income paid in taxes, calculated by dividing the total tax paid by the total income.