M & M Proposition I with no tax supports the argument that:
A)business risk determines the return on assets.
B)the cost of equity rises as leverage rises.
C)the debt-equity ratio of a firm is completely irrelevant.
D)a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E)homemade leverage is irrelevant.

Question

Quizplus · Accepted Answer

M&M Proposition I with no tax states that the value of a firm is unaffected by its capital structure. This implies that the debt-equity ratio is completely irrelevant and does not affect the cost of equity or the return on assets. Therefore, choice C is the correct answer. Choices A, B, D, and E are not supported by M&M Proposition I with no tax.

M & M Proposition I with No Tax Supports the Argument