The Essence of Modigliani and Miller's Irrelevance Theory Is That

question 29

Multiple Choice

The essence of Modigliani and Miller's irrelevance theory is that

• A) increasing operating leverage will maximize EPS.
• B) shareholders prefer to invest in firms with a high degree of financial leverage.
• C) altering a firm's capital structure will increase its value.
• D) utilizing more debt will increase a firm's value.
• E) the value of the firm will not be changed by how assets are distributed between bondholders and stockholders.

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Definitions:

Financial Advantage

The benefit gained in a financial context that puts an individual, company, or country in a better position than others.

Fixed Production Costs

Expenses that do not change with the level of production, such as rent, salaries, and equipment leasing.

Unit Product Cost

The calculated cost of producing a single unit of product, including direct materials, labor, and overhead costs.

Average Cost

The cost calculated by dividing the total cost of goods available for sale by the total units available for sale.