MM proposition I states that a firm's value is unaffected by its:
A) required rate of return on equity.
B) operating income, in the absence of taxes.
C) interest rate paid on debt.
D) mixture of debt and equity.

Question

Quizplus · Accepted Answer

According to MM proposition I, a firm's value is determined by its cash flows and the risk of those cash flows, not by the financing choices made by the firm. Therefore, the mixture of debt and equity does not affect a firm's value.

MM Proposition I States That a Firm's Value Is Unaffected