Firm X plans to increase its financial leverage by issuing debt and using the proceeds to repurchase equity.If you assume that the Modigliani and Miller assumptions hold,then the effect of this increasing financial leverage transaction should

Question

Quizplus · Accepted Answer

According to the Modigliani and Miller theorem, under certain conditions, the capital structure of a firm is irrelevant in determining its market value. This means that changing the financial leverage of the firm through issuing debt and repurchasing equity should have no effect on the market value of the firm's shares. Therefore, the correct answer is B, i.e., it will have no effect on the market value of Firm X's shares.

Firm X Plans to Increase Its Financial Leverage by Issuing