The Contribution of M&M Comes from the Fact That There

question 121

Multiple Choice

The contribution of M&M comes from the fact that there is a constant trade-off ratio.Which of the statements below describe this constant trade-off ratio?

• A)When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital remains constant.
• B)When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital increases.
• C)When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital decreases.
• D)None of these

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Definitions:

Sales Price

The amount of money charged for a product or service, or the sum a customer pays to purchase something.

Salvage Value

The presumed value for resale of an asset at life’s operational end.

Depreciation

The methodical reduction of the recorded cost of a fixed asset to allocate its expense over its useful life.

Capital Expenditures

Resources deployed by an organization to buy or enhance hard assets such as premises, manufacturing facilities, or devices.