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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure

According to the Modigliani-Miller (MM) proposition without taxes, the market value of a firm is determined by:

Under the Modigliani-Miller proposition without taxes, firm value depends on the earning power and business risk of its assets, not on the debt-equity mix. Financing choices merely divide the same operating earnings between lenders and shareholders, so capital structure is irrelevant to value.

  1. AIts earning power and business risk of its assets, not by its capital structureCorrect
  2. BThe proportion of debt in its capital structure
  3. CThe dividend payout ratio it follows
  4. DThe face value of equity shares issued

Explanation

MM (without taxes) argues that firm value depends on the operating earnings and the business risk of assets. How the earnings are split between debt and equity holders does not change total value. The debt-proportion option reflects the traditional approach, not MM.

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