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

  1. A Capital structure is irrelevant to firm value
  2. B Debt always increases firm value
  3. C Equity financing is always cheaper
  4. D Dividends determine firm value
Answer

Capital structure is irrelevant to firm value

Without taxes, bankruptcy costs or information asymmetry, firm value depends only on its assets. Introducing tax-deductible interest creates a value from the debt tax shield.

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