The basic lesson of MM theory is that the value of a ﬁrm is dependent upon the:
A)capital structure of the ﬁrm.
B)total cash ﬂows of the ﬁrm.
C)percentage of a ﬁrm to which the bondholders have a claim.
D)tax claim placed on the ﬁrm by the government.
E)size of the shareholders claims on the ﬁrm.

Question

Quizplus · Accepted Answer

According to MM theory, the value of a firm is dependent upon its total cash flows. This means that the value of a firm is not affected by its capital structure or the specific claims of bondholders or shareholders. The tax claim placed on the firm by the government may have an indirect impact on cash flows, but it is not the primary factor that determines firm value. Therefore, option B is the best choice.

The Basic Lesson of MM Theory Is That the Value