CAL ME Question 5 Which of the following statements is correct regarding capital structure? I. The Modigliani-Miller Propositions in perfect capital markets state that capital structure does not matter to firm value. As a result, firms should have zero debt in their capital structure under perfect capital markets. II. The Modigliani-Miller Propositions state that in the presence of taxes and the absence of bankruptcy costs, firm value increases with leverage because levered firms pay more taxes than identical unlevered firms. The situation in which equity holders have a disincentive to raise new capital to invest in projects that would make debt safer, even if these projects have a positive net present value is often known as the debt overhang problem. IV. The empirical evidence on capital structure shows that although the capital structure of firms varies across industries, it is similar across countries. A. B. C. Il only Ill only I and il only II, III and IV only None of the choice combinations given in A., B., C., and D. are correct