Which of These Will Occur in a World with Taxes

question 38

Multiple Choice

Which of these will occur in a world with taxes and financial distress when a firm is operating at its optimal capital structure?
I.The debt-equity ratio will be optimal.
II.The weighted average cost of capital will be at its minimal point.
III.The required return on assets will be at its maximum point.
IV.The increased benefit from additional debt will equal the increased bankruptcy costs of that debt.

• A)I and IV only
• B)II and III only
• C)I and II only
• D)II,III,and IV only
• E)I,II,and IV only

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Definitions:

Questionable Act

Pertains to actions or behaviors that raise doubt regarding their morality, ethics, or legality, often eliciting scrutiny or criticism.

Festinger And Carlsmith

Festinger and Carlsmith were social psychologists who conducted seminal experiments on cognitive dissonance, demonstrating how conflicting beliefs can lead to mental discomfort and attitude change.

Cognitive Dissonance

A psychological condition in which an individual experiences discomfort or distress from holding two or more conflicting beliefs, attitudes, or values.

Cognitive Dissonance Theory

A theory proposed by Leon Festinger that suggests discomfort arises from holding two conflicting beliefs, leading to an alteration in one's attitudes or behaviors to reduce the dissonance.