MM Proposition I with Taxes Is Based on the Concept

question 20

Multiple Choice

MM 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 the firm does not matter because investors can use homemade leverage.
• C) the firm is better off with debt based on the weighted average cost of capital.
• D) the value of the firm increases as total debt increases because of the interest tax shield.
• E) the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Net Sales

The amount of revenue generated by a company after deducting returns, allowances for damaged goods, and discounts.

Modified Accelerated Cost Recovery System (MACRS)

A tax depreciation system in the United States that allows for the accelerated write-off of property under various classifications.

Federal Income Tax

A tax levied by the federal government on the annual earnings of individuals, corporations, trusts, and other legal entities.

Double-declining Balance

A method of accelerated depreciation where the asset’s book value is decreased at double the rate of traditional straight-line depreciation.