In a world with no taxes and no bankruptcy costs,
A) the firm's value is unaffected by capital structure.
B) the firm should maximize the value of the firm by maximizing the firm's debt.
C) the firm should borrow to the point where the marginal benefits of debt equal the marginal costs.
D) the firm cannot make a decision about the optimal capital structure with the existing information.

Question

Quizplus · Accepted Answer

In a world with no taxes and no bankruptcy costs, the value of the firm is solely based on its underlying assets and operations, and is not affected by the firm's capital structure. This means that the firm's value remains constant regardless of the level of debt. Therefore, the optimal capital structure is irrelevant and the firm should focus on maximizing its underlying operations and profitability.

In a World with No Taxes and No Bankruptcy Costs