What is the Modigliani-Miller proposition in a world without taxes?
- A Capital structure is irrelevant to firm value
- B Debt always increases firm value
- C Equity financing is always cheaper
- 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.





