Question

Which of the following factors explain why a company's capital structure is relevant to it's value?

A. information asymmetry between the company's management and its investors.

B. All of these answers.

C. Agency costs.

D. Bankruptcy costs.

Answer 1

The correct answer is B .All of these

Explanation

In the absence of bankruptcy costs, agency costs, and asymmetric information, in an efficient market, the value of a firm is unaffected by its capital structure

According to The Modigliani–Miller theorem  theory;

The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle.