Question

Which of the following statements is FALSE? Select one:

a. In a tax-optimal capital structure, the level of interest payments depends on the level of EBIT.

b. The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive—namely, the cash flows the investor will receive before all taxes have been paid.

c. To determine the true tax benefit of leverage, we need to evaluate the combined effect of both corporate and personal taxes.

d. Personal taxes have an indirect effect on the firmʹs weighted average cost of capital.

Answer 1

Ans b. The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive—namely, the cash flows the investor will receive before all taxes have been paid.

Correct statement is: The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive—namely, the cash flows the investor will receive after all taxes have been paid eg, Interest/ Dividend, Capital Gain Income etc.