Which of the Following Statements Is FALSE

question 63

Multiple Choice

Which of the following statements is FALSE?

• A)In general,the gain to investors from the tax deductibility of interest payments is referred to as the interest tax shield.
• B)The interest tax shield is the additional amount that a firm would have paid in taxes if it did not have leverage.
• C)Because Corporations pay taxes on their profits after interest payments are deducted,interest expenses reduce the amount of corporate tax firms must pay.
• D)As Modigliani and Miller made clear in their original work,capital structure matters in perfect capital markets.Thus,if capital structure does not matter,then it must stem from a market imperfection.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent or salaries.

Variable Cost

A cost that changes with the level of output or production, such as materials and labor costs.

EBIT

Earnings Before Interest and Taxes; a measure of a company's profitability that excludes interest and income tax expenses.

EPS

Earnings Per Share - a company's profit divided by its number of outstanding shares, indicating the profitability on a per-share basis.