A Limitation of the MM Analysis in the Absence of Taxes

question 55

Multiple Choice

A limitation of the MM analysis in the absence of taxes is that:

• A)risky debt is not considered.
• B)the possibility of default on debt is not considered.
• C)there is no cost associated with default on debt.
• D)only risk-free debt is considered.

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Definitions:

Average Investment

The mean value of all investments held over a specific period, used to analyze investment performance.

Straight-Line Depreciation

A technique for spreading the expense of a physical asset evenly across its operational lifespan each year.

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Present Value Method

A financial calculation that determines the current worth of a future sum of money or stream of cash flows given a specific rate of return.