Which of the Following Will Happen If the Original Modigliani

question 32

Multiple Choice

Which of the following will happen if the original Modigliani and Miller Theorem is relaxed to include taxes,but not bankruptcy costs?

• A)Increased usage of financial leverage will increase a firm's composite cost of capital indefinitely.
• B)Increased usage of financial leverage will lower a firm's composite cost of capital indefinitely.
• C)Increased usage of financial leverage will not affect a firm's composite cost of capital.
• D)Increased usage of operating leverage will increase a firm's composite cost of capital indefinitely.

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Definitions:

Footnote Disclosure

Additional notes included in financial statements to provide more detailed information about the company's fiscal status, accounting policies, or individual line items.

Contingencies

Conditions or events with uncertain outcomes that may represent potential liabilities and are recorded in financial statements if they are probable and estimable.

Sick Pay Policy

A company's formal plan detailing the compensation employees receive when they are unable to work due to illness.

Vacation Pay

This refers to the compensation employees are entitled to receive for days they are on vacation and not working.