TRUE OR FALSE

1. According to M&M theory, the cost of equity for a levered firm is lower than the cost of equity of an identical unlevered firm because of the tax benefits of issuing debt.

2. M&M theory argues that in a world with corporate taxes, firms with leverage are more valuable than an identical unlevered firm.

3. The value of the tax shield causes the unlevered firm to lose value in the relation to an identical firm with leverage.

4. M&M argues that the value of the firm is independent of their capital structure. Therefore, in a world with zero taxes, the value of the firm is unaffected by capital structure.