Which of the following is consistent with the original formulation of the Modigliani and Miller Capital Structure Theorem?
A) A firm's weighted average cost of capital decreases as financial leverage is used.
B) A firm's common stock price falls as financial leverage is used.
C) A firm's weighted average cost of capital and common stock price are unaffected by the amount of financial leverage used by the firm.
D) A firm's weighted average cost of capital increases as operating leverage is used.

Question

Quizplus · Accepted Answer

The Modigliani and Miller Capital Structure Theorem states that the value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of its capital structure. Therefore, the firm's weighted average cost of capital and common stock price are unaffected by the amount of financial leverage used by the firm.

Which of the Following Is Consistent with the Original Formulation