In a Perfect World of No Taxes,which Statement Regarding MM

question 78

Multiple Choice

In a perfect world of no taxes,which statement regarding MM propositions is true?

• A)According to proposition I, a firm is able to find its optimal capital structure.
• B)Proposition II implies that an increase in leverage raises the risk of equity and thereby the required return on equity.
• C)According to proposition II, changes in the capital mix of a firm will not affect the debt and equity values of the firm.
• D)Proposition I states that the total firm value critically depends on capital structure.

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Definitions:

Margin

The difference between the selling price of a product and the cost of producing or purchasing it, or the collateral required to secure a loan or derivative position.

Zero Coupon Interest Rate

A rate of interest reflecting the discount from par at which zero-coupon bonds are sold. This rate is not paid annually but at maturity.

Arbitrage Profit

Profit earned from buying and selling the same asset in different markets to take advantage of differing prices for the same asset.

Stock Index

A measurement of a section of the stock market calculated from the prices of selected stocks, representing a specific market or sector.