Which Statement Correctly Describes Proposition I of Modigliani and Miller

question 44

Multiple Choice

Which statement correctly describes proposition I of Modigliani and Miller?

• A) The value of the firm is independent of its capital structure.
• B) If there is no default risk, firms should exclusively use debt to finance projects.
• C) If there is no default risk, firms should exclusively use equity to finance projects.
• D) The value of the firm's tax shields depends solely on the amount of debt issued.

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Definitions:

Period Costs

Expenses that are not tied directly to the production process and are instead recognized as expenses in the period in which they are incurred.

Direct Materials Cost

The expenditure on raw materials that are directly used in the manufacturing of a product.

Direct Labor Cost

Expenses that are directly attributable to the manufacturing of products, including wages of workers who physically convert materials into finished goods.

Factory Overhead Cost

Indirect costs related to manufacturing, including expenses such as utilities, maintenance, and wages for indirect labor.