Which One of These Statements Corresponds to MM Proposition I

question 50

Multiple Choice

Which one of these statements corresponds to MM proposition I without taxes?

• A) Debt interest has no effect on either equity income or firm value.
• B) Debt interest reduces equity income and increases firm value.
• C) Debt interest reduces equity income but does not affect firm value.
• D) The value of a firm increases as its debt-equity ratio increases.

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Definitions:

Factor Portfolio

A portfolio that is constructed to have a high sensitivity to certain economic or financial factors, aiming to capture specific risk premiums.

Well-diversified Portfolio

An investment portfolio comprised of various assets to reduce exposure to risk by spreading investments across different industries, asset classes, or other categories.

Beta

A measure of the volatility, or systematic risk, of a security or portfolio compared to the market as a whole.

Factor Portfolio

A portfolio constructed to have a high sensitivity to certain risk factors, aiming to achieve specific investment outcomes related to those factors.