Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm...

Question

Question

Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm value), with taxes?

		a)Firm value increase with firm leverage when debt ratio is low, and then decrease with firm leverage when debt ratio is too high
		b)The value of a firm unlevered is greater than the value levered
		c)There could be an arbitrage opportunity when two firms that are virtually identical except for their capital structure are selling in the market at different values.
		d)Increasing debt will always increase firm value.

Answer 1

Answer #1

Value of firm is maximized at 100% debt ratio

Answer 2

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