Match each of the following definitions to the appropriate terms: Terms (1- inde

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.,

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