MM Proposition I,with Tax,supports the Theory That

question 74

Multiple Choice

MM Proposition I,with tax,supports the theory that

• A)the value of an unlevered firm is equal to the value of a levered firm plus the interest tax shield.
• B)the value of a firm is inversely related to the amount of leverage used by the firm.
• C)there is a positive linear relationship between the debt-to-equity ratio and firm value.
• D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
• E)a firm's weighted average cost of capital increases as the debt-equity ratio of the firm increases.

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Definitions:

Excess Cash

Funds that exceed the normal operating needs of a company, potentially available for investment or distribution to shareholders.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from its total revenue.

Stock Dividend

A payment to shareholders in the form of additional shares instead of cash.

Retained Earnings

Retained earnings refer to the portion of net income that is retained by the corporation rather than distributed to its shareholders as dividends.