Which One of the Following Statements Is the Core Principle

question 23

Multiple Choice

Which one of the following statements is the core principle of M&M Proposition I, without taxes?

• A)A firm's cost of equity is directly related to the firm's debt-equity ratio.
• B)A firm's WACC is directly related to the firm's debt-equity ratio.
• C)The interest tax shield increases the value of a firm.
• D)The capital structure of a firm is totally irrelevant.
• E)Levered firms have greater value than unlevered firms.

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Definitions:

Lumber Mill

A facility where logs are cut into lumber through various sawing processes, often also involving the finishing and treatment of wood.

Standstill Agreement

A contract between a company and its creditors where the creditors agree not to increase the level of their claims, pursue further action, or demand payment for a certain period of time, usually during restructuring.

Minority Stake

An ownership position in a company that is less than 50 percent, allowing the holder to have a share in the profits but not control decisions.

Target Firm

A company that has been identified as a potential acquisition target by another company or investor.