MM Proposition I with no tax supports the argument that:
A)business risk determines the return on assets.
B)the cost of equity rises as leverage rises.
C)it is completely irrelevant how a ﬁrm arranges its ﬁnances.
D)a ﬁrm should borrow money to the point where the tax beneﬁt from debt is equal to the cost of the
Increased probability of ﬁnancial distress.
E)ﬁnancial risk is determined by the debt-equity ratio.

Question

Quizplus · Accepted Answer

MM Proposition I with no tax essentially states that the value of a firm is not affected by its financial structure. In other words, it suggests that it is completely irrelevant how a firm arranges its finances. Therefore, choice C is the correct answer. Choice A is incorrect because the proposition does not address business risk. Choice B is incorrect because it refers to MM Proposition II, which involves taxes. Choice D is incorrect because it refers to the trade-off theory of capital structure, which also involves taxes. Choice E is incorrect because it suggests that financial risk is solely determined by the debt-equity ratio, which is not necessarily true according to MM Proposition I.

MM Proposition I with No Tax Supports the Argument That