If MM's Proposition I holds, minimizing the weighted average cost of capital (WACC)is the same as maximizing the
A)market value of the firm.
B)book value of the firm.
C)profits of the firm.
D)liquidating value of the firm.

Question

Quizplus · Accepted Answer

MM's Proposition I states that the cost of capital of a firm is independent of its capital structure, which means that the WACC remains constant regardless of the proportion of debt and equity in the capital structure. Therefore, minimizing the WACC is equivalent to maximizing the market value of the firm, as the value of the firm is determined by its future cash flows discounted by the WACC. Maximizing the book value, profits, or liquidating value of the firm does not necessarily lead to maximizing the market value of the firm.

If MM's Proposition I Holds, Minimizing the Weighted Average Cost