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

question 25

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)the capital structure of a firm does not matter because investors can use homemade leverage.
• C)a firm's WACC is unaffected by a change in the firm's capital structure.
• D)the value of a firm increases as the firm's debt increases because of the interest tax shield.
• E)the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Elaboration Likelihood Model

A theory in social psychology that explains different ways of processing stimuli, why they are used, and their outcomes on attitude change, distinguishing between central and peripheral routes.

Infomercial

A television program that combines information and advertisement to promote a product or service in an informative manner.

Endorsing

The act of giving one's public approval or support to someone or something.

Elaboration Likelihood Model

A theory explaining how people might change their attitudes in two ways, either through deep, thoughtful consideration of arguments (central route) or through superficial cues (peripheral route).