Which of the Following Situations Obeys Modigliani and Miller's Propositions

question 35

Multiple Choice

Which of the following situations obeys Modigliani and Miller's propositions regarding financial gearing (in a world with no tax) ?

• A) Company B has an enterprise value of £550m when it is financed entirely by equity and a value of £600m when 40 per cent of its capital is debt.
• B) Company D has an enterprise value of £50m when debt is 60 per cent of total capital and an enterprise value of £50m when debt is 95 per cent of total capital.
• C) Company A has a weighted average cost of capital (WACC) of 14 per cent and an enterprise value of £10m when debt is 30 per cent of total capital, and a WACC of 12 per cent at a debt level of 50 per cent of total capital.
• D) Company C has the lowest weighted average cost of capital at the highest possible gearing level.

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Phonology

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