With the Inclusion of Taxes,MM I Is Incorrect and the Capital

question 93

Multiple Choice

With the inclusion of taxes,MM I is incorrect and the capital structure of the firm can be important due to:

• A) lower tax rates on dividends than on debt.
• B) higher tax rates on retained earnings than on debt.
• C) lower tax liability due to interest deductibility.
• D) higher operating income from less dividends.

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Definitions:

General Rule

A principle or guideline that applies broadly and is considered to be of general use or value.

External Sales

Sales made to parties outside of the company, as opposed to internal transactions.

Variable Cost

Costs that vary directly with the level of production or volume of output.

Excess Capacity

The situation where a company's production facilities can produce more goods than currently demanded by its market.