MM Proposition I with Taxes Supports the Theory That

question 46

Multiple Choice

MM Proposition I with taxes supports the theory that:

• A) there is a positive linear relationship between the amount of debt in a levered firm and its value.
• B) the value of a firm is inversely related to the amount of leverage used by the firm.
• C) the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
• 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 rises.

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Definitions:

Work in Process Inventory

Items currently undergoing production but have not yet reached completion.

Lower of Cost

A principle requiring that inventory be recorded at the lower of its historical cost or current market value.

Net Realisable Value

The estimated selling price in the ordinary course of business minus any costs necessary to make the sale, used primarily in inventory valuation.

Inventory Accounts

Accounts used in accounting to track the cost of the inventory held by a business until it is sold or otherwise disposed of.