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What does the Modigliani-Miller proposition state in a world without taxes?

  1. A Firm value is independent of capital structure
  2. B Debt always increases value
  3. C Equity is always cheaper
  4. D Dividends determine value
Answer

Firm value is independent of capital structure

Introducing tax-deductible interest creates value through the debt tax shield, which is where the trade-off theory begins.

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