For a Firm That Pays No Corporate Taxes, Changing Its

question 24

Multiple Choice

For a firm that pays no corporate taxes, changing its capital structure will:

• A)change the total cash it pays out to investors.
• B)change the risk of the cash flows.
• C)change both the cash flows and the risk of the cash flows.
• D)not affect the cash flows nor the risk of the cash flows.

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Definitions:

Intra-entity Gross Profit

Profits recognized from transactions that occur within the same company, not yet realized by the external market.

Income Tax Liability

The total amount of taxes owed by an individual or a business entity to the federal, state, or local government based on income.

Operating Income

Income generated from the core business operations of a company, excluding income from investments and expenses not related to the primary business activities.

Tax Rate

The percentage at which an individual or corporation is taxed, which can vary depending on the income or profit levels.