According to Modigliani and Miller (MM)'s basic theory of capital structure, which of the following is considered when determining the value of a firm?
A) Tax deductible interests
B) Personal income taxes
C) Brokerage costs
D) Bankruptcy costs
E) Retained earnings

Question

Quizplus · Accepted Answer

According to MM's basic theory, the value of a firm is determined solely by its earning power and the risk of its underlying assets, and not by its capital structure. Therefore, tax deductible interests, which affect the earning power of the firm, are considered when determining the value of a firm. Personal income taxes, brokerage costs, bankruptcy costs, and retained earnings are not considered in MM's basic theory.

According to Modigliani and Miller (MM)'s Basic Theory of Capital