The MM Theory with Taxes Implies That Firms Should Issue

question 38

Multiple Choice

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

• A) debt is more risky than equity.
• B) bankruptcy is a disadvantage to debt.
• C) firms will incur large agency costs of short term debt by issuing long term debt.
• D) both debt is more risky than equity; and bankruptcy is a disadvantage to debt.
• E) both bankruptcy is a disadvantage to debt; and firms will incur large agency costs of short term debt by issuing long term debt.

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Definitions:

Central Planning

A system of economy in which all choices about the creation and allocation of goods and services are made by the government or a central body.

Capitalist Form

A socio-economic system characterized by private ownership of capital goods, investments determined by private decision, and prices, production, and the distribution of goods determined mainly by competition in a free market.

Mixed Economy

An economic system combining private and public enterprise.

Private Sector

Refers to the part of the economy that is run by individuals and companies for profit and is not state controlled.