Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because Blank______. Multiple select question. capital structures are fixed as debt is added, the equity becomes more risky the overall cost of capital cannot be reduced debt is not cheaper than equity

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05-07-2022
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Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because Blank______. Multiple select question. capital structures are fixed as debt is added, the equity becomes more risky the overall cost of capital cannot be reduced debt is not cheaper than equity

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Tutorconsortium323idn Tutorconsortium323idn · Answer 1 · 2022-07-17T19:38:10-04:00

Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because as debt is added, the equity becomes more risky the overall cost of capital cannot be reduced.

What are the main propositions of MM approach?

Miller and Modigliani theory mentions two propositions. Proposition I states that the market value of any firm is independent of the amount of debt or equity in capital structure. Proposition II states that the cost of equity is directly related and incremental to the percentage of debt in capital structure.

The Modigliani-Miller Proposition I without taxes states that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

MM Proposition I without taxes is used to illustrate:

The value of an unlevered firm equals that of a levered firm
That one capital structure is as good as another
Leverage does not affect the value of the firm
Capital structure changes have no effect on stockholder's welfare.

Value of a firm levered(VL)=Value unlevered(VU) = [tex]\frac{EBIT}{r_{WACC} }[/tex]

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What are the main propositions of MM approach?

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