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Modigliani-Miller (MM) Hypothesis without taxes asserts:
ACapital structure affects firm value
BEquity is irrelevant
COptimal D/E ratio is 1:1
DCapital structure does not affect firm value
Answer & Solution
Correct answer: D. Capital structure does not affect firm value
1. MM (Proposition I) without taxes: Vu = Vl. Firm value independent of capital structure.
2. Investors can homemade-lever via personal borrowing.
3. Arbitrage forces ensure no difference in value.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §2.4_