Which of the Following Statements Concerning Capital Structure Theory Is

question 30

Multiple Choice

Which of the following statements concerning capital structure theory is NOT CORRECT?

• A) under mm with zero taxes, financial leverage has no effect on a firm's value.
• B) under mm with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
• C) under mm with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
• D) under mm with corporate taxes, the effect of business risk is automatically incorporated because rsl is a function of rsu.
• E) the major contribution of miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

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Definitions:

Book Value Per Share

The financial measure that indicates the per-share value of a company, calculated by dividing total equity minus preferred stock by the number of outstanding shares.

Liquidated

The process of converting assets into cash, usually in the context of dissolving a business or paying off debt.

Balance Sheet

A financial statement that shows a company's financial position at a specific point in time, including assets, liabilities, and shareholder equity.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from revenues.