Which of the following is a feature of the 'Modigliani-Miller Theorem'?
A. Capital structure is the only determinant of firm value
B. The value of a firm always rises with higher leverage
C. In perfect capital markets, the value of a firm is independent of its capital structure
D. Dividend policy always affects firm value
Answer: Option C
Solution (By JKSSB Mock Tests)
The Modigliani-Miller theorem asserts that, under perfect capital markets (no taxes, no bankruptcy costs, no asymmetric information), the total value of a firm is independent of whether it is financed by debt or equity.
Explanation:
The financial accelerator describes how deteriorations in borrowers’ balance sheets raise external finance premia, further reducing spending and amplifying the effects of the original shock.
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