Which one of the following statements concerning financial leverage is correct in a world without taxes?
A) Leverage is beneficial only when EBIT is relatively low.
B) EPS is decreased when leverage is used and the expected level of EBIT is achieved.
C) Financial leverage lowers the risk level of a firm.
D) The amount of financial leverage employed has a major effect on the value of the firm.
E) M&M Proposition I states that financial leverage is irrelevant to the value of a firm.

Question

Quizplus · Accepted Answer

M&M Proposition I, proposed by Modigliani and Miller, states that in a world without taxes, transaction costs, or other market imperfections, the value of a leveraged firm is the same as the value of an unleveraged firm. This implies that financial leverage does not affect the overall value of the firm, making option E correct.

Which One of the Following Statements Concerning Financial Leverage Is