The interest tax shield adds value to a levered (part debt part equity) firm. A True B False

Holding other factors constant, an increase in the tax rate on revenue generated by capital will: Group of answer choices not affect investment. increase business expenditure. decrease investment. increase investment.

Please answer MCQ

Which is not a benefit of debt to the corporation?a. interest payments are tax deductibleb. when debt is used heavily, it increases stock valuec. In periods of inflation, debt is paid back with amounts that are worth less than the ones borrowed.d. compared to equity, debts have a lower cost of capitale. answer not given

True (t) or False (f) _____ A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer?   A. More information is needed.   B. The prudent investor would prefer dividends—a dollar today is always worth more than a dollar to be received in the future.   C. The prudent investor would be indifferent between receiving dividends or capital gains.   D. The prudent investor would prefer capital gains—the capital gain tax liability can be deferred until gains are realized.

Under the trade-off theory, lowering the corporate tax rate will incentivize companies to increase the ratio of debt in their capital structure.   Question options:   a) True   b) False

Modigliani and Miller Proposition II states that: the optimal capital structure occurs when the marginal cost of distress equals the marginal benefit of interest tax shields the cost of cost of levered equity is equal to the cost of unlevered equity, in the absence of taxes, since the value of the levered firm equals the value of the unlevered firm. the capital structure if the firm is irrelevant, regardless of the corporate tax rate. the cost of levered equity is equal to the cost of unlevered equity plus a premium that is proportional to the (market value) debt-to-equity ratio