The MM Theory with Taxes Implies That Firms Should Issue

question 19

Multiple Choice

The MM theory with taxes implies that firms should issue maximum debt. In practice,this is not true because:

• A) debt is more risky than equity.
• B) bankruptcy is a disadvantage to debt.
• C) firms will incur large agency costs of short term debt by issuing long term debt.
• D) Both debt is more risky than equity; and bankruptcy is a disadvantage to debt.
• E) Both bankruptcy is a disadvantage to debt; and firms will incur large agency costs of short term debt by issuing long term debt.

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Definitions:

Output

The total amount of goods and services produced by an economy, company, or industry within a specific period.

Long-Run Supply Curve

A graphical representation showing the relationship between price and the quantity supplied that firms are willing to produce, given all inputs are variable.

Output

The cumulative quantity of products or services generated by a corporation, sector, or economic system.

Short Run

A period in economics during which at least one factor of production is fixed, influencing decisions on production and costs.