The MM Theory with Taxes Implies That Firms Should Issue

question 38

Multiple Choice

The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because:

• A) debt is more risky than equity.
• B) bankruptcy is a disadvantage to debt.
• C) firms will incur large agency costs of short term debt by issuing long term debt.
• D) both debt is more risky than equity; and bankruptcy is a disadvantage to debt.
• E) both bankruptcy is a disadvantage to debt; and firms will incur large agency costs of short term debt by issuing long term debt.

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Definitions:

T Procedure

A statistical method used to infer the unknown mean of a population based on a sample mean, especially when the sample size is small.

Non-Normality

A characteristic of a dataset that deviates from the bell-shaped curve associated with a normal distribution, potentially affecting statistical tests.

Skewness

Skewness is a measure of the asymmetry of the probability distribution of a real-valued random variable about its mean, indicating how much the distribution leans towards the left or right.

P-value

A statistical measure that helps scientists determine the significance of their research results, indicating the probability of observing the results given that the null hypothesis is true.