In a world of no corporate taxes if the use of leverage does not change the value of the levered ﬁrm relative to the unlevered ﬁrm this is known as:
A)MM Proposition III that the cost of equity is less than the cost of debt.
B)MM Proposition I that leverage is invariant to market value.
C)MM Proposition II that the cost of equity is always constant.
D)MM Proposition I that the market value of the ﬁrm is invariant to the capital structure.
E)MM Proposition III that there is no risk associated with leverage in a no tax world.

Question

Quizplus · Accepted Answer

According to MM Proposition I, the market value of the firm is invariant to the capital structure in a world with no taxes. This means that the use of leverage does not change the overall value of the firm, so the choice D is correct. Proposition III states that the cost of equity is greater in levered firms, and Proposition II states that the cost of equity increases with leverage, but neither of these propositions is applicable in a world with no taxes. The statement in choice E is also not true, as there is still risk associated with leverage even without taxes.

In a World of No Corporate Taxes If the Use