Certified Financial Modeler (CFM)

According to the Modigliani-Miller theorem in a world with no taxes, which statement is true?

A firm's value increases as it takes on more debt due to reduced equity risk An optimal capital structure exists at 100% equity financing A firm's total value is unaffected by its capital structure Debt reduces the firm's cost of equity by lowering operating risk

Correct Answer:

A firm's total value is unaffected by its capital structure

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