Which of the Following Is True of the Capital Structure

question 13

Multiple Choice

Which of the following is true of the capital structure irrelevance theorem?

• A)If two firms are identical in their capital structures,there is no opportunity to earn arbitrage profits exists if the total values of the two firms are not the same.
• B)If the capital structure decision has no effect on the total cash flows that a firm can distribute to its debt and equity holders the decision will only affect the firm?s equity.
• C)If two firms are identical except for their capital structures,an opportunity to earn arbitrage profits exists if the total values of the two firms are not the same.
• D)If the capital structure decision has no effect on the total cash flows that a firm can distribute to its debt and equity holders then the levered cash flows will be less than the unlevered cash flows.

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Definitions:

Interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Payments

Regular amounts of money paid by one party to another, often in exchange for goods, services, or to fulfill a legal obligation.

Ordinary Annuity

Harmony of equal contributions at the end of each cycle for a particular duration.

Expressed

Clearly stated, articulated, or otherwise made known in explicit terms.