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    Question

    According to the Modigliani-Miller (MM) theory (ignoring

    taxes), what is the impact of debt on the value of a firm?
    A Value increases with debt Correct Answer Incorrect Answer
    B Value decreases with debt Correct Answer Incorrect Answer
    C Value is unaffected by capital structure Correct Answer Incorrect Answer
    D Value increases only if interest is low Correct Answer Incorrect Answer

    Solution

    Under MM theory (no taxes), the firm’s value is independent of debt-equity mix. The value is based on operating income, not financing structure.

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