In a perfect world of no taxes,what happens if the weighted average cost of capital (WACC) is unaffected by the capital structure?
A)MM proposition I holds.
B)MM proposition II holds.
C)SML is positively sloped.
D)SML is negatively sloped.

Question

Quizplus · Accepted Answer

MM proposition I states that the value of a firm is independent of its capital structure when there are no taxes, bankruptcy costs, or agency costs. In this scenario, where there are no taxes, if the WACC remains unaffected by changes in capital structure, then the value of the firm would remain constant regardless of the amount of debt or equity used to finance the firm. Therefore, MM proposition I holds true. MM proposition II and the SML are related to the effects of leverage on the cost of capital, which is not relevant in this scenario.

In a Perfect World of No Taxes,what Happens If the Weighted