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)MM Proposition III that the cost of stock is less than the cost of debt.
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

This scenario is describing MM Proposition I which states that the market value of the firm is not affected by the capital structure. It is not describing MM Proposition II or III, which relate to the cost of capital and the effect of leverage on risk.

In a World of No Corporate Taxes If the Use