Question

According to which of the following, the firm's market value is not affected by capital structure?

• A. M-M Hypothesis
• B. Net Income approach
• C. The Traditional view
• D. None of the above

Answer 1

The correct option is A M-M Hypothesis

The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.