Question

Before the Inclusion of Corporate Tax explain why M & M Proposition II suggested that capital structure of a firm does not affect the cost of capital of the firm?

Answer 1

Solution:

According to the Modigliani-Miller theorem (M&M), a company's market value is correctly calculated as the present value of its future earnings and underlying assets and is independent of its capital structure.

According to the Modigliani-Miller theorem, a company's capital structure has no bearing on its value. According to the theorem, market value is determined by the present value of future earnings.