Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent...
Which of the following is TRUE?
I. With perfect capital markets, a firm's WACC is independent of its capital structure and is equal to its equity cost of capital if the firm is unleveraged.
II. Given a 35% corporate tax rate, for every £1 in new permanent debt that the firm issues, the value of the firm increases by £0.35.
III. A key assumption of MM's Proposition I without taxes is that individuals can borrow on their own account at the same rate as the firm.
IV. Firms have an incentive to increase leverage to exploit the tax benefits of debt. But with too much debt, they are likely to risk default and incur financial distress costs.
A. I and IV only
B. II and IV only
C. I, II and IV only
D. I, II, III and IV
Homework Answers
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Which of the following is TRUE?
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