MM Proposition I states that:
A)the value of a company depends on its capital structure.
B)the value of a company depends on the debt to assets ratio.
C)the value of a company depends on the debt to total assets ratio.
D)the value of a company is independent of its capital structure.

Question

Quizplus · Accepted Answer

MM Proposition I states that the value of a company is independent of its capital structure, assuming perfect markets and no taxes. In other words, the value of a company is determined by its underlying assets and the expected cash flows generated by those assets, not by how those assets are financed. This proposition holds only in a theoretical world, as in reality, taxes and other frictions affect the optimal capital structure of a company.

MM Proposition I States That