Asked by Maria Scavone on Jun 10, 2024
Verified
The proposition that the value of the firm is independent of its capital structure is called:
A) The Capital Asset Pricing Model.
B) M&M Proposition I (without taxes) .
C) M&M Proposition II.
D) The Law of One Price.
E) The Efficient Markets Hypothesis.
Capital Asset Pricing Model
A model that describes the relationship between systematic risk and expected return for assets, particularly stocks.
M&M Proposition I
Modigliani and Miller Proposition I states that in a world without taxes, bankruptcy costs, and asymmetric information, a firm's value is unaffected by how it is financed, whether by debt or equity.
Law Of One Price
An economic theory that states that in efficient markets, identical goods must have only one price.
- Absorb the fundamentals of M&M propositions and their significance in corporate finance, including how the composition of capital structure can alter the valuation of a firm.
Verified Answer
MO
Magie OrtegaJun 13, 2024
Final Answer :
B
Explanation :
M&M Proposition I (without taxes), formulated by Franco Modigliani and Merton Miller, states that in a perfect market (without taxes, bankruptcy costs, etc.), the value of a firm is not affected by how that firm is financed, whether through debt or equity.
Learning Objectives
- Absorb the fundamentals of M&M propositions and their significance in corporate finance, including how the composition of capital structure can alter the valuation of a firm.