According to the capital structure theory proposed by the Modigliani and Miller (MM), a firm's optimal capital structure is the mix of debt and equity that minimizes its weighted average cost of capital (WACC), which occurs when the firm is financed almost entirely with debt. MM argued that their conclusion is valid primarily because, in the real world, ______.
A. there are no flotation costs associated with issuing debt
B. investors pay less personal income taxes on the interest they earn on their investments in bonds than they pay on the dividends they receive from corporations
C. firms that issue large amounts of debt have much less probability of going bankrupt than firms that have little or no debt in their capital structures.
D. the amount of debt a firm uses to finance its assets does not affect its market value
E. interest paid on corporate debt is a tax-deductible expense to the firm, whereas dividends paid to stockholders are not.
Answer: E
You might also like to view...
Which of the following does not contribute to the establishment of an international division?
A) An organizational unit should be headed by a committed senior manager. B) Complexity of international operations to make its own decisions. C) Recognition of the need for internal specialists. D) A lack of desire by management to scan the globe for opportunities and threats. E) Assembling a staff that will take the responsibility to coordinate.
Which judgmental method takes the most current sales and adds a judgmentally determined x percent, where x is the estimated percentage change in sales?
A) Linear extrapolation B) Naïve extrapolation C) Exponential smoothing D) Moving averages
After the accounts are closed and the journal entries have been posted, which of the following accounts would have a balance?
a. Payroll Tax Expense; b. Accumulated Depreciation; c. Professional Fees; d. Drawing; e. Sales
A quality audit involves a review of Manufacturing Cost of Quality Processes quality standards documentation
a. No No No b. Yes Yes Yes c. Yes No Yes d. No Yes Yes