Modigliani and Miller Followed Up Their Initial Work with a New

question 84

Multiple Choice

Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes.Which of the statements below results from this model?

• A)A new Proposition I with taxes and it states: All debt financing is optimal.
• B)A new Proposition II with taxes and it states: The WACC of the firm falls as more debt is added.
• C)The more debt sold,the greater the tax shield and the smaller the government's share of the firm.
• D)All of these

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Definitions:

SST

Total Sum of Squares, a measure in statistics that quantifies the total variance in a dataset.

Yearly Income

The total amount of money earned by an individual or entity in one year.

Estimated Regression

A statistical process for estimating the relationships among variables, predicting one variable based on the value of others.

SSE

Sum of Squared Errors, a measure of the difference between the observed and predicted values in statistical models.