Why Does MM Proposition I Not Hold in the Presence

question 9

Multiple Choice

Why does MM Proposition I not hold in the presence of corporate taxes?

• A)Levered firms pay lower taxes when compared with identical unlevered firms.
• B)Bondholders require higher rates of return compared with stockholders.
• C)Earnings per share are no longer relevant with taxes.
• D)Dividends are no longer relevant with taxes.

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Definitions:

Aircraft Production

The process and industry involved in designing, manufacturing, and assembling aircraft.

Newspaper Printing

The process of mass-producing copies of a newspaper document, whereby the news and other data are printed onto papers.

Economies of Scale

The cost advantage that arises with increased output of a product, where the average cost per unit decreases as the scale of production rises.

Inputs

Resources such as labor, materials, and capital used in the production process to create goods and services.