The original form of the Modigliani and Miller Capital Structure Theorem
A) ignores the effect of taxes.
B) ignores the relationship between firm value and cost of capital.
C) ignores transaction costs.
D) both A and C are true.

Question

Quizplus · Accepted Answer

The Modigliani and Miller Capital Structure Theorem in its original form does not take into account the effect of taxes or transaction costs. It assumes perfect capital markets and that the cost of capital and firm value are unaffected by the firm's capital structure. Therefore, both choices A and C are true.

The Original Form of the Modigliani and Miller Capital Structure