The Reason That MM Proposition I Does Not Hold in the Presence

question 32

Multiple Choice

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

• A)bondholders require higher rates of return compared with stockholders.
• B)levered firms pay less taxes compared with identical unlevered firms.
• C)dividends are no longer relevant with taxes.
• D)earnings per share are no longer relevant with taxes.
• E)All of the above.

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Definitions:

Average Variable Costs

The per unit cost of production that varies with the level of output, including elements like labor and raw materials.

Average Costs

Average costs represent the total costs of production divided by the total output or the cost per unit of output, often used to assess the efficiency of production processes.

Shutting-Down

The process of ceasing operations or activities, often temporarily or permanently, for businesses or projects.

Long-Run

A period where all inputs or factors of production can be varied by firms, allowing them to adjust all aspects of their operations.