In a Perfect World of No Taxes,which Statement Regarding MM

question 78

Multiple Choice

In a perfect world of no taxes,which statement regarding MM propositions is true?

• A)According to proposition I, a firm is able to find its optimal capital structure.
• B)Proposition II implies that an increase in leverage raises the risk of equity and thereby the required return on equity.
• C)According to proposition II, changes in the capital mix of a firm will not affect the debt and equity values of the firm.
• D)Proposition I states that the total firm value critically depends on capital structure.

---

Definitions:

Change in Net Working Capital

The difference between the current assets and current liabilities from one period to the next, reflecting changes in liquidity and operational efficiency.

Average Tax Rate

The ratio of the total amount of taxes paid to the total tax base (taxable income or spending), representing the average tax burden.

Capital Gains

The profit earned from the sale of assets like stocks, bonds, or real estate, which exceeds the purchase price.

Non-Eligible Dividends

Dividends paid from earnings that are not eligible for the enhanced dividend credit in certain jurisdictions, typically leading to higher tax rates for the recipient than eligible dividends.