Which One of These Statements Corresponds to MM Proposition I

question 50

Multiple Choice

Which one of these statements corresponds to MM proposition I without taxes?

• A) Debt interest has no effect on either equity income or firm value.
• B) Debt interest reduces equity income and increases firm value.
• C) Debt interest reduces equity income but does not affect firm value.
• D) The value of a firm increases as its debt-equity ratio increases.

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Definitions:

Investing Activities

Transactions involving the acquisition or sale of long-term assets and investments, reflected in a company’s cash flow statement.

Financing Activities

Activities that result in changes in the size and composition of the equity capital and borrowings of the entity.

Operating Activities

Activities that relate to the core business operations of a company, including revenue and expense transactions.

Free Cash Flow

The amount of cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.