Fundamentals of Financial Management Concise
Quiz 13: Capital Structure and Leverage
Modigliani and Miller's First Article Led to the Conclusion That
Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no effect on a firm's value.
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Modigliani and Miller's first article led to the conclusion that capital structure is extremely important,and that every firm has an optimal capital structure that maximizes its value and minimizes its cost of capital.
It is possible for Firms A and B to have identical financial and operating leverage,yet for Firm A to have more risk as measured by the variability of EPS.This would occur if Firm A has more business risk than Firm B.
As the text indicates,a firm's financial risk can and should be divided into separate market and diversifiable risk components.
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