The basic lesson of M & M Theory is that the value of a firm is dependent upon:
A)the firm's capital structure.
B)the total cash flow of the firm.
C)minimizing the marketed claims.
D)the amount of marketed claims to that firm.
E)size of the stockholders' claims.

Question

Quizplus · Accepted Answer

The Modigliani-Miller theorem (M&M Theory) posits that under certain market conditions (notably, the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market), the value of a firm is unaffected by how that firm is financed. It is determined solely by the projected earnings (or cash flows) of the firm and not by the mix of debt and equity used to finance the firm. Therefore, the total cash flow of the firm is what impacts its value according to the M&M Theory.

The Basic Lesson of M & M Theory Is That