A key underlying assumption of MM Proposition I without taxes is that:
A)financial leverage increases risk.
B)individuals can borrow at lower rates than corporations.
C)individuals and corporations borrow at the same rate.
D)managers always act to maximize the value of the firm.
E)corporations are all-equity financed.

Question

Quizplus · Accepted Answer

MM Proposition I without taxes assumes that individuals and corporations can borrow at the same rate, making the cost of capital independent of the capital structure. This assumption forms the basis for the proposition that the value of the firm is determined by its cash flows and the risk of its assets, and is not affected by how those assets are financed. Financial leverage, or the use of debt financing, does not increase risk according to this proposition.

A Key Underlying Assumption of MM Proposition I Without Taxes