Which of the Following Is NOT an Example of a Short-Term

question 65

Multiple Choice

Which of the following is NOT an example of a short-term macroeconomic shock?

• A) a drought
• B) high unemployment
• C) increased military spending
• D) a change in the tax code
• E) political unrest

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Definitions:

MM Model

This refers to the Modigliani-Miller theorem, a foundational element of corporate finance theory that proposes, under certain conditions, the value of a firm is unaffected by how it is financed.

Corporate Taxes

Taxes imposed on the income or profit of corporations by the government, affecting the company's net income and cash flow.

Miller Model

A theory that incorporates corporate taxes and bankruptcy costs to determine the optimal capital structure for a firm.

Trade-Off Theory

The addition of financial distress and agency costs to either the MM tax model or the Miller model. When trade-off is added to either model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shield) and the costs of debt (financial distress and agency costs).