M&M's Proposition II Suggests That in a World of No

question 57

Multiple Choice

M&M's Proposition II suggests that in a world of no taxes and no bankruptcy,________.

• A)no matter what the debt-equity ratio is,the R_a or WACC of the firm increases with debt
• B)the value of the firm is sensitive to the funding choice between debt and equity
• C)in simple terms,as the firm adds more debt to the financing mix,the shareholders require a higher and higher return on equity such that it exactly offsets the use of the cheaper debt
• D)Statements A,B,and C are all incorrect.

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Definitions:

Quality Costs

Expenses associated with preventing, detecting, and correcting defective work, including costs of quality control measures and rework.

Direct Material Costs

The costs of raw materials or components that are directly traceable to a finished product.

Prevention Costs

Expenses incurred to prevent or minimize the number of defects in the manufacturing process.

Overapplied

A situation where the allocated overhead costs exceed the actual overhead costs incurred.