-In the Modigliani and Miller World Where We Now Assume

question 37

Multiple Choice

$\begin{array}{c}\begin{array}{|l|}\hline \\\hline \\ \hline \text {Anticipated operating income }\\ \hline \text {Interest}\\ \hline \text {Earnings before tax}\\ \hline \text {Tax at 30 \% }\\ \hline \text {Earnings after tax}\\\hline \\ \hline \text {Combined debt and equity income }\\ \text {(interest plus earnings after tax) }\\ \hline \end{array}\begin{array}{l|} \hline \text {ALL EQUTTY}\\ \hline \\ \hline \$ 1,000,000 \\\hline\underline{\quad\quad}\\ \hline\$1,00,000\\ \hline\underline{\$300,000}\\ \hline \$ 700,000 \\ \hline\\ \hline\\\$700,000\\ \hline\end{array}\begin{array}{l|} \hline \text {EQUITY AND DEBT}\\\hline\\\hline\$ 1,000,000 \\\hline\underline{\$ 200,000} \\\hline\$ 800,000 \\\hline\underline{\$-}\\\hline\$\\\hline\\\hline\\\$\\\hline\end{array}\end{array}$
-In the Modigliani and Miller world where we now assume that taxes exist,and that interest payments are tax deductible for firms,then which of the following statements is true?

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Definitions:

Economy

Refers to the comprehensive system of production, distribution, and consumption of goods and services within a specific geographic region.

Constant Growth Model

A method for valuing a stock by assuming a constant rate of dividend growth, often used in financial analysis to estimate the present value of future dividends.

Terminal Value

An estimate of an asset's value at the end of a projection period, often used in discounted cash flow analysis.

Cash Flow Analysis

The examination of a company's inflows and outflows of cash to evaluate its financial health and operational efficiency.