The MM Theory with Taxes Implies That Firms Should Issue

question 37

Multiple Choice

The MM theory with taxes implies that firms should issue maximum debt.In practice,this does not occur because:

• A)debt is more risky than equity.
• B)bankruptcy is a disadvantage to debt.
• C)the weighted average cost of capital is inversely related to the debt-equity ratio.
• D)the weighted average cost of capital is directly related to the debt-equity ratio.
• E)U.S.regulations require the debt-equity ratio of publicly-traded firms to be in the range of .3 to .7.

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