Which of the Following Is True Regarding a Reasonable Choice

question 1

Multiple Choice

Which of the following is true regarding a reasonable choice for a discount rate to apply to interest tax savings?

• A)If the firm is expected to increase its debt ratio, you should use the expected return on the firm's debt,
• B)If the firm is expected to maintain a constant debt ratio, you should use the firm's weighted average cost of capital, WACC.
• C)If the firm is expected to decrease its debt ratio, you should use the expected return on the firm's equity,
• D)None of the above is a true statement.

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Definitions:

Personal-use Asset

An asset primarily used for personal enjoyment or living purposes, not for business or investment aims.

Like-kind Exchange

A tax-deferred transaction allowing for the disposal of an asset and the acquisition of another similar asset without generating a tax liability from the sale of the first asset.

Installment Method

A tax procedure that allows the taxpayer to spread the income and taxes owed on the sale of property over the period in which the payments are received.

Gross Profit Percentage

A financial ratio showing the proportion of money left over from revenues after accounting for the cost of goods sold.