Match each of the following definitions to the appropriate terms: Terms (1- inde
ID: 2763388 • Letter: M
Question
Match each of the following definitions to the appropriate terms: Terms (1- independence theory with corporate taxes,2- independence theory- no taxes, 3- saucer-shaped cost of capital curve), Definitions (A- The Cost of capital is unaffected by the firm’s choice of debt and equity financing. , B- The cost of capital decreases as the firm initially uses debt to substitute for equity financing but eventually begins to increase as extreme levels of debt are used., C-The cost of capital decreases continuously as the firm increases its reliance on debt financing.
Explanation / Answer
1- independence theory with corporate taxes C -The cost of capital decreases continuously as the firm increases its reliance on debt financing.
2- independence theory- no taxes A- The Cost of capital is unaffected by the firm’s choice of debt and equity financing.
3- saucer-shaped cost of capital curve B- The cost of capital decreases as the firm initially uses debt to substitute for equity financing but eventually begins to increase as extreme levels of debt are used.,