M & M Proposition I with Taxes Is Based on the Concept

question 25

Multiple Choice

M & M Proposition I with taxes is based on the concept that:

• A)the optimal capital structure is the one that is totally financed with equity.
• B)the capital structure of a firm does not matter because investors can use homemade leverage.
• C)a firm's WACC is unaffected by a change in the firm's capital structure.
• D)the value of a firm increases as the firm's debt increases because of the interest tax shield.
• E)the cost of equity increases as the debt-equity ratio of a firm increases.

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Definitions:

Option Contract

A contract which grants the holder the right, but not the obligation, to buy or sell an asset at a specified price on or before a specified date.

Unilateral Contract

is a type of contract where only one party makes a promise or undertakes a performance obligation in exchange for an act by the other party, creating a binding agreement once the act is performed.

Revocable Offer

An offer that can be withdrawn by the offering party before it is accepted by the offeree, typically within a certain time frame.

Unilateral Offer

An offer made by one party where acceptance is performed through an action rather than a promise of action.