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:

Common Stock

Common stock represents ownership shares in a corporation, giving holders voting rights and a residual claim on corporate earnings in the form of dividends.

Indirect Method

The indirect method is a way of preparing the cash flow statement in which net income is adjusted for changes in balance sheet accounts to compute the cash flow from operating activities.

Operating Activities

Daily business functions and transactions related to a company's core business operations, such as sales, provision of services, and purchasing of raw materials.

Expenses

Costs incurred in the process of earning revenue, including operational costs, utilities, salaries, and rent.