In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:
A) conservation of energy principle.
B) MM Proposition I that leverage is invariant to market value.
C) MM Proposition II that the cost of equity is always constant.
D) MM Proposition I that the market value of the firm is invariant to the capital structure.
E) MM Proposition III that there is no risk associated with leverage in a no tax world.

Question

Quizplus · Accepted Answer

MM Proposition I states that in a world without taxes, transaction costs, or bankruptcy costs, the market value of a levered firm is the same as the market value of an unlevered firm. This implies that the capital structure (the mix of debt and equity financing) does not affect the total value of the firm.

In a World of No Corporate Taxes If the Use