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:

Required Rate of Return

The minimum annual percentage return an investor expects to earn from an investment to consider it worthwhile.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual, exchange-traded, and closed funds.

Market Risk Premium

The additional yield investors anticipate from maintaining a portfolio with inherent market risk rather than opting for assets free of risk.

Required Rate of Return

The minimum annual percentage return investors expect or demand from an investment, considering the risk involved.