The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming perfect markets and no taxation is that: I. a firm cannot affect its value by changing its capital structure II. the value of the firm is determined by its total cash flows III. the weighted average cost of capital increases as financial leverage decreases IV. the weighted average cost of capital decreases as financial leverage decreases V. the weighted average cost of capital remains the same whatever the level of financial leverage. Which of the statements is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a I and V only I, Il and V only II, II and IV only None of the above I and Il only
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Consider the following statements: The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming perfect markets and no
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