MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

Question

Quizplus · Accepted Answer

According to MM Proposition I, the value of a firm is determined by its cash flows, not by the way it is financed. In a perfect capital market, investors can buy and sell securities without transaction costs, and therefore the value of a firm is equal to the present value of its future free cash flows, which represent the cash generated by the firm's assets that is available to be paid out to investors. Therefore, the correct choice is D) free cash flows.

MM Proposition I States That in a Perfect Capital Market