MM Proposition I,without taxes,supports the argument that
A)business risk determines the return on assets.
B)it is completely irrelevant how a firm arranges its finances.
C)the cost of equity rises as leverage rises.
D)a firm should borrow money up to the point where the cost of debt equals the cost of equity.
E)financial risk is determined by the debt-equity ratio.

Question

Quizplus · Accepted Answer

MM Proposition I, without taxes, states that the value of a firm is not affected by its capital structure. Thus, it is completely irrelevant how a firm arranges its finances. This means that in the absence of taxes, the cost of equity and the WACC (Weighted Average Cost of Capital) are constant regardless of the firm's capital structure. Therefore, choice B is the correct answer. The other choices are incorrect based on the assumptions of MM Proposition I.

MM Proposition I,without Taxes,supports the Argument That