In the Context of the M&M Irrelevance Theorem, in a World

question 1

Multiple Choice

In the context of the M&M Irrelevance theorem, in a world with no taxes and no bankruptcy costs,

• A)the firm's value is unaffected by capital structure.
• B)the firm should maximize the value of the firm by maximizing the firm's debt.
• C)the firm should borrow to the point where the marginal benefits of debt equal the marginal costs.
• D)the firm cannot make a decision about the optimal capital structure with the existing information.

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Definitions:

Substitution Effect

The change in consumption patterns due to a change in relative prices, where consumers replace more expensive items with less costly alternatives.

Inferior Good

Items for which demand falls when the income levels of buyers go up, unlike standard goods that see an increase in demand with rising incomes.

Income Effect

How shifts in the financial status of individuals or whole economies affect their purchasing desires for specific goods or services.

Price Increase

An increase in the price of products or services.