Which one of the following makes the capital structure of a company irrelevant?
A) Taxes
B) Interest tax shield
C) 100 percent dividend payout ratio
D) Debt-equity ratio that is greater than 0 but less than 1
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 account, rather than relying on the company to take on debt. 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) is irrelevant to the company's value. This theorem assumes no taxes, bankruptcy costs, agency costs, or asymmetric information, and in such an idealized world, investors can undo the effects of corporate leverage on their own, making the company's choice of capital structure irrelevant.

Which One of the Following Makes the Capital Structure of a Company