Homemade leverage makes which one of the following irrelevant?
A) Cash flows from an investment.
B) Interest payments on a loan.
C) Dividends on a stock.
D) A firm's capital structure.
E) A firm's effective tax rate.

Question

Quizplus · Accepted Answer

Homemade leverage refers to the use of personal borrowing by investors to change the overall amount of financial leverage (debt) to which they are exposed. According to the Modigliani-Miller theorem, in a world without taxes, bankruptcy costs, and other market imperfections, a firm's capital structure is irrelevant to its value. This means that investors can replicate any corporate capital structure through personal borrowing, making the firm's capital structure irrelevant to its value.

Homemade Leverage Makes Which One of the Following Irrelevant