The capital structure chosen by a ﬁrm doesn't really matter because of:
A)taxes.
B)the interest tax shield.
C)the relationship between dividends and earnings per share.
D)the effects of leverage on the cost of equity.
E)homemade leverage.

Question

Quizplus · Accepted Answer

Homemade leverage refers to the ability of investors to create their own leverage by borrowing on their own, rather than relying on the company to do so. This concept is central to the Modigliani-Miller theorem, which posits that under certain conditions, the capital structure of a company (i.e., the mix of debt and equity financing) does not affect its overall value. This is because investors can replicate the effects of corporate leverage through personal borrowing, making the firm's choice of capital structure irrelevant to its value.

The Capital Structure Chosen by a ﬁRm Doesn't Really Matter