Which of the following statements is FALSE?
A) When a firm borrows significant money to repurchase shares or pay a large cash dividend, the transaction is called a leveraged recapitalization.
B) MM Proposition I applies to capital structure decisions made at any time during the life of a firm.
C) By choosing positive-NPV projects that are worth more than their initial investment, a firm can enhance its value.
D) The choice of capital structure does not change the value of a firm if the cost of equity is higher than the cost of debt.

Question

Quizplus · Accepted Answer

MM Proposition I states that under a market with no taxes, bankruptcy costs, agency costs, and asymmetric information, the value of a firm is not affected by its capital structure. This implies that the value of a firm is determined by its real assets, not by how it finances those assets. Therefore, the choice of capital structure (mix of debt and equity) does not inherently change the value of a firm, regardless of the relative costs of equity and debt. The false statement is D because it suggests that the value of a firm changes with the choice of capital structure if the cost of equity is higher than the cost of debt, which contradicts MM Proposition I.

Which of the Following Statements Is FALSE