The law of conservation of value implies that:
A) The value of a firm's common stock is unchanged when debt is added to its capital structure
B) The value of any asset is preserved regardless of the nature of the claims against it
C) The value of a firm's debt is unchanged when common stock is added to its capital structure
D) None of the above

Question

Quizplus · Accepted Answer

The law of conservation of value states that the value of any asset is preserved regardless of the nature of the claims against it. This means that the value of an asset remains constant regardless of whether it is financed with equity, debt or a combination of both. Therefore, choice A and C are incorrect as they suggest a change in value due to a change in capital structure. Choice D is incorrect as there is a correct answer.

The Law of Conservation of Value Implies That