MM Proposition I with Taxes Is Based on the Concept

question 44

Multiple Choice

MM Proposition I with taxes is based on the concept that the:

• A)optimal capital structure is the one that is totally financed with equity.
• B)capital structure of the firm does not matter because investors can use homemade leverage.
• C)firm is better off with debt based on the weighted average cost of capital.
• D)presence of taxes causes debt to be valuable to a firm.
• E)cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

IRRs

The Internal Rate of Return is a financial measurement utilized to assess the projected profitability of future investments.

After-Tax Cost

After-Tax Cost is the expense associated with a transaction or activity, taking into account the effect of income tax deductions or liabilities.

Tax Rate

The percentage at which an individual or corporation is taxed, which can vary according to income or profit levels.

Cost of Debt

The cost of debt is the effective rate that a company pays on its total debt, used in capital structuring decisions to evaluate the affordability of borrowing.