The Maximum Firm Value,according to the Static Theory of Capital

question 44

Multiple Choice

The maximum firm value,according to the static theory of capital structure,occurs at a point where the:

• A)financial distress costs are equal to zero
• B)value of the firm equalises the costs of financial distress with the present value of the tax shield on debt
• C)value of a levered firm initially begins to exceed that of an unlevered firm
• D)value of the firm is equal to the value defined by M&M Proposition I,with tax
• E)value of the firm,as defined by M&M Proposition I,with tax,is exactly equal to the value of the firm,as defined by M&M Proposition I,without tax

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Definitions:

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Miller-Orr Model

A mathematical model used in finance to manage cash flow and determine the optimal level of cash balances for a firm.

BAT Model

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