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.
21. MM Proposition I that the market value of the firm is invariant to the capital structure.
The solution explains some multiple choice questions relating to MM Proposition