M & M Proposition I with Tax Supports the Theory

question 6

Multiple Choice

M & M Proposition I with tax supports the theory that:

• A)a firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.
• B)the value of a firm is inversely related to the amount of leverage used by the firm.
• C)the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
• D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
• E)a firm's cost of equity increases as the debt-equity ratio of the firm decreases.

---

Definitions:

Utilities Expense

The cost incurred from the consumption of utility services such as electricity, water, and gas in the business operations.

Income Summary Account

An account used in closing entries to gather all income and expense items, facilitating the transfer of their net balance to retained earnings.

Expense Accounts

Accounts used to record the costs incurred to operate a business, which are then matched against revenues to determine net income.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from total revenue.