According to the basic capital structure theory proposed by Modigliani and Miller (MM), when will a firm's value be maximum?
A)When it is financed entirely with equity.
B)When its capital structure contains 50 percent debt and 50 percent equity.
C)When it is financed entirely with retained earnings.
D)When it is financed with almost 100 percent through debt.
E)When its assets are financed with 50 percent equity and 50 percent retained earnings.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller's capital structure irrelevance theory (without taxes), the firm's value is unaffected by its capital structure. However, with taxes, the value is maximized when the firm is financed with 100% debt due to the tax shield on interest payments.

According to the Basic Capital Structure Theory Proposed by Modigliani