Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will
A) remain constant regardless of capital structure because the cost of debt and the cost of equity are the same.
B) remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk.
C) increase proportionally with the increase in the amount of debt a firm uses.
D) decrease proportionally with the increase in the amount of debt a firm uses.

Question

Quizplus · Accepted Answer

The independence hypothesis, as part of the Modigliani-Miller theorem under no taxes, posits that a firm's weighted average cost of capital remains unchanged with varying capital structures. This is because the cost of equity increases with more debt due to higher financial risk, offsetting the cheaper cost of debt.

Assuming No Corporate Taxes,the Independence Hypothesis Suggests That a Firm's