MM's proposition is violated when the firm, by imaginative design of its capital structure, can offer some financial service that meets the need of such a clientele.

Question

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MM's proposition states that the value of a firm is independent of its capital structure. However, if the firm can offer a financial service (such as tax benefits or lower financing costs) that meets the needs of a specific group of investors, the value of the firm can be influenced by its capital structure. This violates MM's proposition.

MM's Proposition Is Violated When the Firm, by Imaginative Design