Which of the following is consistent with the original formulation of the Modigliani and Miller Capital Structure Theorem?
A)A firm's composite cost of capital decreases as financial leverage is used.
B)A firm's common stock price falls as financial leverage is used.
C)A firm's composite cost of capital and common stock price are unaffected by the amount of financial leverage used by the firm.
D)A firm's composite cost of capital increases as operating leverage is used.
E)A firm's common stock price rises as operating leverage is used.

Question

Quizplus · Accepted Answer

The Modigliani and Miller Capital Structure Theorem states that the value of a firm is not affected by its capital structure or the way it finances its operations. Therefore, the composite cost of capital and the common stock price of a firm are not impacted by the amount of financial leverage used by the firm. Option A is incorrect as it suggests that the cost of capital decreases with financial leverage. Option B is incorrect as it suggests that the common stock price falls with financial leverage. Options D and E are also incorrect as they refer to operating leverage, which is not part of the Modigliani and Miller Capital Structure Theorem.

Which of the Following Is Consistent with the Original Formulation