M&M Proposition 1 states that the capital structure of a company does not affect the required rate of return on a company's assets, while M&M Proposition 2 shows that the required rate of return on company's equity does change with capital structure decisions.

Question

Quizplus · Accepted Answer

M&M Proposition 1, also known as the Modigliani-Miller Theorem, states that the value of a company is determined by its cash flows and the risk of those cash flows, and that the capital structure of the company does not affect the required rate of return on a company's assets. M&M Proposition 2, on the other hand, shows that the required rate of return on company's equity does change with capital structure decisions. Therefore, the statement in the question is true, and the answer is A.

M&M Proposition 1 States That the Capital Structure of a Company