Jake Invested $800 in an IRA

question 53

Multiple Choice

Jake invested $800 in an IRA.If he has a 15 percent marginal tax rate and the contribution is tax deductible,Jake will

• A)pay $120 more in taxes.
• B)pay $120 less in taxes.
• C)receive no change to his tax liability.
• D)have $800 more in adjusted gross income.

---

Definitions:

Miller Model

A theory that incorporates corporate taxes and bankruptcy costs to determine the optimal capital structure for a firm.

Trade-Off Theory

The addition of financial distress and agency costs to either the MM tax model or the Miller model. When trade-off is added to either model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shield) and the costs of debt (financial distress and agency costs).

Debt Financing

A method of funding in which a company raises capital by borrowing money, agreeing to repay the principal amount along with interest on a specified schedule.

MM Model

The Modigliani-Miller theorem, proposing that in perfect markets, the value of a firm is unaffected by its capital structure.