Which one of the following makes the capital structure of a firm irrelevant?
A)taxes
B)interest tax shield
C)100 percent dividend payout ratio
D)debt-equity ratio that is greater than 0 but less than 1
E)homemade leverage

Question

Quizplus · Accepted Answer

The Modigliani-Miller theorem posits that under certain conditions, the capital structure of a firm (how it finances its operations through debt vs. equity) is irrelevant to its value. One of these conditions is the absence of taxes, costs of financial distress, and asymmetric information, allowing for "homemade leverage." Homemade leverage refers to the ability of investors to create their own desired level of leverage by borrowing or lending on their own, thus making the firm's choice of capital structure irrelevant to the overall cost of capital and the value of the firm.

Which One of the Following Makes the Capital Structure of a Firm