MM Proposition I with Taxes Is Based on the Concept

question 20

Multiple Choice

MM Proposition I with taxes is based on the concept that:

• A) the optimal capital structure is the one that is totally financed with equity.
• B) the capital structure of the firm does not matter because investors can use homemade leverage.
• C) the firm is better off with debt based on the weighted average cost of capital.
• D) the value of the firm increases as total debt increases because of the interest tax shield.
• E) the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Internal Thought Processes

The mental operations and mechanisms through which individuals perceive, interpret, and organize their internal and external world.

Black Box

In technology and systems theory, a device, system, or object which can be viewed in terms of its inputs and outputs without any knowledge of its internal workings.

Classical Conditioning

A learning process where two stimuli are repeatedly paired; a response that is initially elicited by the second stimulus is eventually elicited by the first stimulus alone.

Higher Class

A social stratum associated with high status, wealth, and power in a society.