Question

Proposition 1 of MM Theory of Capital Structure proposes all of the following except, Select one:...

Proposition 1 of MM Theory of Capital Structure proposes all of the following except,

Select one:

a. No combination of debt and equity security is better than any other

b. The firm’s value is determined by the securities it issues and not by the real assets

c. The firm cannot change the total value of its securities just by splitting its cashflows into different streams

d. The firm’s value is independent on the capital structure

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Answer #1

Option (a): M&M I stated that Vu = Vl i.e value of levered firm is equal to value of levered firm. So, this statement is true. INCORRECT OPTION

Option(b): The value of the firm is determined by its assets and not capital structure.This statement is false. CORRECT OPTION

Option (c): The present value of cash flow determines the value. Changing the cash flow into different streams does not affect the value. Statement is correct. INCORRECT OPTION

Option(d): The value of the firm is determined by the present value of future cash flow. So, capital structure has no role to play. This statement is correct. INCORRECT OPTION

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