The Modigliani-Miller (MM) theorem is a foundational element in modern corporate finance. Under the theorem's basic assumptions, the value of a firm is independent of its capital structure, making option b the correct answer.

Here's a step-by-step explanation:

1. The MM theorem is based on a model of a perfect market, where there are no taxes, bankruptcy costs, or asymmetry of information, and where investors can borrow and lend at the same rate.

2. In this model, the firm's value is determined by its real assets, not by the way it finances investments or distributes dividends.

3. Therefore, the firm's capital structure, which includes debt and equity, does not affect its overall value. This is known as the MM theorem's capital structure irrelevance principle.

4. This principle implies that the firm's value is independent of its capital structure, which contradicts options a, c, and d.

So, the correct answer is b: "Independent of its capital structure".

Question

The Modigliani-Miller (MM) theorem is a foundational element in modern corporate finance. Under the theorem's basic assumptions, the value of a firm is independent of its capital structure, making option b the correct answer.

Here's a step-by-step explanation:

1. The MM theorem is based on a model of a perfect market, where there are no taxes, bankruptcy costs, or asymmetry of information, and where investors can borrow and lend at the same rate.

2. In this model, the firm's value is determined by its real assets, not by the way it finances investments or distributes dividends.

3. Therefore, the firm's capital structure, which includes debt and equity, does not affect its overall value. This is known as the MM theorem's capital structure irrelevance principle.

4. This principle implies that the firm's value is independent of its capital structure, which contradicts options a, c, and d.

So, the correct answer is b: "Independent of its capital structure".

Knowee AI · Accepted Answer

The Modigliani-Miller (MM) theorem is a foundational element in modern corporate finance. Under the theorem's basic assumptions, the value of a firm is independent of its capital structure, making option b the correct answer.

Here's a step-by-step explanation:

1. The MM theorem is based on a model of a perfect market, where there are no taxes, bankruptcy costs, or asymmetry of information, and where investors can borrow and lend at the same rate.

2. In this model, the firm's value is determined by its real assets, not by the way it finances investments or distributes dividends.

3. Therefore, the firm's capital structure, which includes debt and equity, does not affect its overall value. This is known as the MM theorem's capital structure irrelevance principle.

4. This principle implies that the firm's value is independent of its capital structure, which contradicts options a, c, and d.

So, the correct answer is b: "Independent of its capital structure".

The Modigliani-Miller (MM) model states that, under certain assumptions, the value of a firm is:a.Dependent on its capital structureb.Independent of its capital structurec.Directly proportional to its earnings per share (EPS)d.Inversely proportional to its weighted average cost of capital (WACC)

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