M & M Proposition I with Taxes Is Based on the Concept

question 25

Multiple Choice

M & M Proposition I with taxes is based on the concept that:

• A)the optimal capital structure is the one that is totally financed with equity.
• B)the capital structure of a firm does not matter because investors can use homemade leverage.
• C)a firm's WACC is unaffected by a change in the firm's capital structure.
• D)the value of a firm increases as the firm's debt increases because of the interest tax shield.
• E)the cost of equity increases as the debt-equity ratio of a firm increases.