MM Proposition I,without taxes,assumes that
A)debt is riskless.
B)individuals and corporations can borrow at the same rate.
C)firms can borrow at the risk-free rate.
D)individuals and firms are taxed at the same rate thereby making taxes irrelevant.
E)all firms will prefer an unlevered capital structure.

Question

Quizplus · Accepted Answer

MM Proposition I, without taxes, assumes that individuals and corporations can borrow at the same rate, known as the "cost of capital," implying that the cost of debt is the same for both parties. This proposition concludes that the value of the firm is independent of its capital structure, implying that different capital structures will not affect the firm's overall value. However, this proposition assumes no taxes, no agency costs, no bankruptcy costs, and perfect information.

MM Proposition I,without Taxes,assumes That