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.

Question

Quizplus · Accepted Answer

M&M Proposition I with no tax argues that the value of a firm is determined by its earning power and the riskiness of its assets, and is independent of the way it chooses to finance its investments. Thus, the specific arrangement of a firm's financing is completely irrelevant.

M&M Proposition I with No Tax Supports the Argument That