Why Does MM Proposition I Not Hold in the Presence

question 70

Multiple Choice

Why does MM Proposition I not hold in the presence of corporate taxation?

• A)Bondholders require higher rates of return when their interest payments are taxed.
• B)Dividends are no longer relevant when taxes are introduced.
• C)A levered firm will pay less tax than the same firm unlevered.
• D)The cost of equity increases with leverage.
• E)The pretax cost of debt increases when taxes are considered .

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Definitions:

Contusion

A Contusion is a bruise resulting from blunt trauma that causes bleeding under the skin without breaking the skin's surface.

Strain

An injury to a muscle or tendon resulting from overstretching or tearing.

Tear

A drop of clear salty liquid secreted by glands in your eyes, often resulting from emotion or irritation.

Perfectly Horizontal

A line on a graph that shows a constant value, indicating no change in the variable it represents across different situations.