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Consider a world where the assumptions of the Modigliani Miller Theorem hold and where investors use...

Consider a world where the assumptions of the Modigliani Miller Theorem hold and where investors use the Capital Asset Pricing Model to price securities. In this world we know that leverage has no impact on firm value. Now, researchers at the Wharton Business School discover that the true pricing model is one with three factors. If everyone uses this new model to price securities, firms may find that changes in leverage will affect firm value. True or False.

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Answer #1

The Modigliani and Miller Approach derives thar the firm market value could be impacted by the operating income aside from the risk i.e. involved in the investment. It also stated that the firm value is not based on the varieties of the capital structure or the financing decisions

So the firm capital structure would not impact the total cost of capital

Now if there is any changes in leverage so it would not impact the value of the firm

Therefore the given statement is false

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