QUESTION 1

Which of the following statements is false?

		The value of a firm is equal to the amount of money the firm can raise by issuing securities.
		For individuals, interest payments received from debt are taxed as income.
		By reducing a firm's corporate tax liability, debt allows the firm to pay more of its cash flows to investors.
		Equity investors must pay taxes on dividends but not capital gains.

QUESTION 2

Which of the following statements is false?

		To determine the true tax benefit of leverage, we need to evaluate the combined effect of both corporate and personal taxes.
		Personal taxes have an indirect effect on the firm's weighted average cost of capital.
		In the United States and many other countries, capital gains from equity have historically been taxed more heavily than interest income.
		A personal tax disadvantage for debt causes the WACC to decline more slowly with leverage than it otherwise would.

QUESTION 3

Which of the following statements is false?

Investors with longer holding periods or with accrued losses face a lower tax rate on equity income, decreasing the effective tax advantage of debt.

Investors with accrued losses that they can use to offset gains face a zero effective capital gains tax rate.

Deferring the payment of capital gains taxes lowers the present value of the taxes, which can be interpreted as a lower effective capital gains tax rate.

Unlike taxes on capital gains or interest income, which are paid annually, taxes on dividends are paid only at the time the investor sells the stock.

QUESTION 4

MM Proposition I with taxes states that:

		the unlevered cost of equity is equal to RWacc.
		the cost of equity rises as the debt-equity ratio increases.
		capital structure does not affect firm value.
		increasing the debt-equity ratio increases firm value.
		firm value is maximized when the firm is all-equity financed.