Equity holders face two sources of risks. One is based on the nature of the business the company is in, which we call the business risk. The other is the financing risk. That is, because the company is partially financed by debt, that adds an extra piece of risk on equity holders.

True/false

The Modigliani and Miller (M&M) Proposition I states that total firm value does NOT depend on capital structure so long as the following two assumptions hold: the total cash flows to debt and equity holders are not affected by capital structure, and there are no arbitrage opportunities in the market.

True/false