Which statement concerning the MM extension with growth is incorrect?
A)The value of a growing tax shield is greater than the value of a constant tax shield.
B)For a given D/E, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
C)For a given D/E, the WACC is less than the WACC under MM's original (with tax) assumptions.
D)The total value of the firm increases with the amount of debt.

Question

Quizplus · Accepted Answer

The statement that the WACC is less than the WACC under MM's original (with tax) assumptions is incorrect. In fact, the WACC is higher under the MM extension with growth, as it takes into account the increased cost of equity due to the higher leverage. The other statements are correct: A) the value of a growing tax shield is greater than the value of a constant tax shield, B) for a given D/E, the levered cost of equity is greater than the levered cost of equity under MM's original assumptions, and D) the total value of the firm increases with the amount of debt.

Which Statement Concerning the MM Extension with Growth Is Incorrect