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# MM Proposition

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21. In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:
MM Proposition III that the cost of stock is less than the cost of debt.
MM Proposition I that leverage is invariant to market value.
MM Proposition II that the cost of equity is always constant.
MM Proposition I that the market value of the firm is invariant to the capital structure.
MM Proposition III that there is no risk associated with leverage in a no tax world.

22. The reason that MM Proposition I does not hold in the presence of corporate taxation is because: (Points: 3)
levered firms pay less taxes compared with identical unlevered firms.
bondholders require higher rates of return compared with stockholders.
earnings per share are no longer relevant with taxes.
dividends are no longer relevant with taxes.
All of the above.

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21. MM Proposition I that the market value of the firm is invariant to the capital structure.

The ...

#### Solution Summary

The solution explains some multiple choice questions relating to MM Proposition

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## Capital Structure, MM Proposition, Leveraged Recapitalization & Optimal Fraction of Debt

1. What type of capital structure should a firm choose and why? In you answer, be sure to include capital structure fallacies and their effects on a firm's decision.
2. Define and discuss MM Proposition I with it's implications, and the roles of homemade leverage and the Law of One Price in the development of the proposition.
3. What is leveraged recapitalization and what effects does it have on the value of equity?
4. Define the optimal fraction of debt and the growth rate of a firm. What is the relationship between the two?

I need original notes that exceed 250 words that will help me answer the questions below:

1. Define the three conditions that make up a perfect capital market, and then compare and contrast the effects of perfect capital markets and imperfect capital markets on value. Can they create or destroy value? Explain.

2. Define EBIT and discuss why the optimal level of leverage from a tax-saving perspective is the level at which interest equals EBIT. Does this have a connection with under-leveraging corporations,both domestically and internationally?

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