Question

M&M Proposition I with tax implies that:

A. The value of a firm is inversely related to the amount of leverage used by the firm.
B. A firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
C. A firm's cost of equity increases as the debt-equity ratio of the firm decreases.
D. A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.
E. The value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.

Answer 1

D. A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.