Given Corporate Taxes, Why Does Adding Debt to the Capital

question 26

Multiple Choice

Given corporate taxes, why does adding debt to the capital structure increase firm value?

• A)Extra cash flow goes to the firm's investors rather than the tax authorities.
• B)Earnings before interest and taxes are fully taxed at the corporate rate.
• C)Personal tax rates are the same as marginal corporate tax rates.
• D)Earnings before interest and taxes are fully taxed at the corporate rate, and personal tax rates are the same as marginal corporate tax rates.

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Definitions:

LIFO

An inventory valuation method, "Last In, First Out," where the most recently produced or purchased items are recorded as sold first.

Periodic Inventory System

An inventory system that updates inventory balances and cost of goods sold at the end of an accounting period based on a physical count.

FIFO

An accounting method for valuing inventory that assumes the first items produced or bought are the first ones sold, standing for First In, First Out.

Weighted-Average Cost Method

An inventory costing method that assigns the average cost of goods available for sale to both ending inventory and cost of goods sold, weighted by the quantity of goods.