Under conditions of perfect capital markets,M&M suggest that the average cost of capital for the firm will ________ with the ________ of debt.
A)decrease; addition
B)remain the same; addition
C)increase; reduction
D)increase; addition

Question

Quizplus · Accepted Answer

According to the Modigliani-Miller theorem, in perfect capital markets, the value of a company is not affected by its capital structure. Therefore, the average cost of capital (WACC) remains the same regardless of the amount of debt in the company's capital structure. This means that adding or reducing debt does not affect the WACC. Therefore, the correct answer is B, which states that the average cost of capital for the firm will remain the same with the addition of debt.

Under Conditions of Perfect Capital Markets,M&M Suggest That the Average