A key assumption of MM's Proposition I without taxes is:
A)that individuals must be able to borrow on their own account at rates equal to the firm.
B)managers are acting to maximize the value of the firm.
C)that financial leverage increases risk.
D)that individuals can borrow on their own account at rates less than the firm.
E)All of the above.

Question

Quizplus · Accepted Answer

Proposition I without taxes assumes that individuals must be able to borrow on their own account at rates equal to the firm. This is because in the absence of taxes, the cost of capital is the same for both the firm and individuals. Therefore, the cost of capital used in the decision-making of the firm should also be equal to the cost of capital available to individuals.

A Key Assumption of MM's Proposition I Without Taxes Is