Modigliani and Miller's Proposition I states that
A)the market value of any firm is independent of its capital structure.
B)the market value of a firm's debt is independent of its capital structure.
C)the market value of a firm's common stock is independent of its capital structure.
D)None of these options.

Question

Quizplus · Accepted Answer

Modigliani and Miller's Proposition I states that the value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of its capital structure. In other words, the market value of any firm is not affected by how it chooses to finance its operations, whether it is through issuing equity or debt. Therefore, option A is the correct answer. Option B is incorrect because the market value of a firm's debt is affected by its capital structure, as the riskiness of debt increases with its proportion in the capital structure. Option C is also incorrect because the market value of a firm's common stock is affected by its capital structure, as the risk and return expectations of shareholders are affected by the firm's capital structure decisions.

Modigliani and Miller's Proposition I States That