Capital Structure Policy in Financial Management
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Questions and Answers

According to Modigliani and Miller's proposition I, in a world with no taxes and no bankruptcy risk, what is the relationship between the value of a leveraged firm (VL) and an all-equity firm (VE)?

  • VL is always less than VE
  • They are equal (correct)
  • VL is always greater than VE
  • They are unrelated

    • What did M&M introduce in their first theory in 1956 regarding capital structure in a world with no taxes and no bankruptcy risk?

  • Equity is always preferred over debt
  • Debt is always preferred over equity
  • Debt-equity mix is irrelevant (correct)
  • Capital structure depends on industry type

    • What does M&M proposition I state about the value of a leveraged firm (VL) compared to an all-equity firm (VE) in the absence of taxes and bankruptcy risk?

  • VL is always greater than VE
  • VL is always less than VE
  • Value does not depend on capital structure (correct)
  • Value depends on industry type

    • In what way does capital structure influence a firm's weighted average cost of capital?

    <p>It can affect the overall cost of capital for the firm</p> Signup and view all the answers

    What did M&M propose about a firm's debt-equity mix in a world with no taxes and no bankruptcy risk?

    <p>It would be irrelevant</p> Signup and view all the answers

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