Modigliani-Miller Proposition I states that in a perfect capital market, the value of a levered firm is the same as the value of an un-levered firm. The following questions relate to how MM proved Proposition I.

A. Briefly discuss how an investor could replicate the payoffs in a levered firm by investing in an un-levered firm.

B. What would happen if a levered firm had a higher value than an un-levered firm even though you invested the same amount of your own money in each firm and they had the same payoffs?

Answer rating: 100% (QA)

A An investor could replicate the payoffs in a levered firm by investing in an unlevered firm throug... View the full answer