The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) ____ process.
A) reinvestment
B) capital asset pricing model
C) arbitraging
D) compound interest

Question

Quizplus · Accepted Answer

The Modigliani-Miller theory is based on the arbitraging process, which assumes that investors are capable of buying and selling securities at fair prices in a perfectly efficient market with no taxes or transaction costs. This allows investors to arbitrage between different capital structures, making the value of the firm independent of its capital structure.

The Modigliani-Miller Theory That the Value of the Firm Is