MM Proposition I with Taxes Supports the Theory That

question 46

Multiple Choice

MM Proposition I with taxes supports the theory that:

• A) there is a positive linear relationship between the amount of debt in a levered firm and its value.
• B) the value of a firm is inversely related to the amount of leverage used by the firm.
• C) the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
• D) a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
• E) a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.

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Definitions:

Supplies

Items used in the operation of a business that are consumed or are not permanent, such as paper, pencils, and cleaning materials.

Net Income

The net income a company achieves following the deduction of all costs, taxes, and expenses from its total earnings.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities, representing the owners' share.

Liabilities

Financial obligations or debts that a company owes to external parties, which must be paid back in the future.