In the absence of taxes,MM argues that
A)no one capital structure for a firm is superior to any other capital structure for that firm.
B)the cost of equity for a levered firm is equal to the firm's unlevered WACC.
C)homemade leverage is insufficient to offset a firm's use of leverage.
D)the value of a levered firm exceeds the value of the unlevered firm.
E)the cost of equity decreases as the debt-equity ratio increases.

Question

Quizplus · Accepted Answer

In the absence of taxes, MM argues that the capital structure of a firm does not affect its overall value. According to MM, investors can create their own homemade leverage if they want to adjust their risk exposure. Therefore, there is no single superior capital structure for a firm. This is known as the irrelevance theory of capital structure.

In the Absence of Taxes,MM Argues That