Which of the Following Statements Concerning the MM Extension with Growth

question 13

Multiple Choice

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

• A) The value of a growing tax shield is greater than the value of a constant tax shield.
• B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
• C) For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.
• D) The total value of the firm increases with the amount of debt.
• E) The tax shields should be discounted at the unlevered cost of equity.

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Definitions:

Law of Diminishing Returns

The principle that as the level of investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other inputs remain constant.

Marginal Cost

The cost of producing one additional unit of a good or service.

Average Total Cost

The total cost of production divided by the quantity produced, indicating the cost effectiveness of producing goods.

Marginal Cost Increases

The rise in the cost to produce one additional unit of a good or service.