MM Proposition I with No Tax Supports the Argument That

question 29

Multiple Choice

MM Proposition I with no tax supports the argument that:

• A)business risk determines the return on assets.
• B)the cost of equity rises as leverage rises.
• C)it is completely irrelevant how a firm arranges its finances.
• D)a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
• E)financial risk is determined by the debt-equity ratio.

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Definitions:

Service Fee

A charge added to a customer's bill for the provision of services by a company or professional.

ROEs

Return on Equity, a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Total Assets Turnover

A financial ratio that measures how effectively a company uses its total assets to generate sales revenue.

Net Working Capital

The difference between a company's current assets and current liabilities, indicating its short-term financial health.