Asked by
Sonya Lorenti
on Dec 09, 2024Verified
M&M Proposition I with no tax supports the argument that:
A) Business risk determines the return on assets.
B) The cost of equity rises as leverage rises.
C) It is completely irrelevant how a firm arranges its finances.
D) A firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E) Financial risk is determined by the debt-equity ratio.
M&M Proposition I
A principle of corporate finance stating that in a world without taxes, transaction costs, and bankruptcy costs, and in an efficient market, a firm's value is unaffected by its financing decisions.
Leverage
The use of borrowed funds to increase the potential return of an investment or project.
Cost of Equity
The rate of return a company must offer investors to compensate for the risk of investing in its stock.
- Comprehend the Modigliani and Miller Propositions regarding capital structure in a no-tax and tax environment.
Verified Answer
FS
Learning Objectives
- Comprehend the Modigliani and Miller Propositions regarding capital structure in a no-tax and tax environment.