Question
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
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, most firms should be financed with 100% equity. 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 less taxes than identical unlevered firms. III. The empirical evidence shows that the capital structure of firms varies across industries and across countries. A. I and II only B. I and III only C. II and III only D. I, II and III E. None of the choice combinations given in A., B., C., and D. are correct.
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