MM Proposition I with Taxes Is Based on the Concept

question 20

Multiple Choice

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

• A) the optimal capital structure is the one that is totally financed with equity.
• B) the capital structure of the firm does not matter because investors can use homemade leverage.
• C) the firm is better off with debt based on the weighted average cost of capital.
• D) the value of the firm increases as total debt increases because of the interest tax shield.
• E) the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Margin

The difference between the selling price of a product and the cost of producing it, often expressed as a percentage of the selling price.

Optimal Quantity

The quantity of a good or service that maximizes efficiency or utility, often where marginal cost meets marginal benefit.

Sweatshirt Production

The process of creating sweatshirts, involving the selection of materials, design, and manufacturing.

MB < MC

This indicates a scenario where the marginal benefit of producing or consuming one more unit of a good is less than the marginal cost of producing that additional unit.