Question
If taxes exist but bankruptcy costs do not, what capital structure does MM imply is optimal?
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Answer
100% debt.
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Question
What financing hierarchy does pecking order theory predict?
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Answer
Internal funds, then debt, then new equity.
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Question
Which theory best explains the statement that leverage changes risk allocation but not total firm value in a no-tax world?
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Answer
MM Proposition I without taxes.
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Question
With corporate taxes in MM, why can adding debt increase firm value?
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Answer
Interest creates a tax shield that adds value.
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