Economics • Economic BasicsHard
What is the primary assumption of the 'Modigliani-Miller Theorem' in corporate finance?
A. Capital markets are imperfect and corporate taxes significantly affect firm value.
B. In a frictionless market, the market value of a firm is decoupled from its capital structure (debt-to-equity ratio).✓ Correct Answer
C. Firms financed entirely through equity always maximize shareholder returns.
D. Dividends distributed to shareholders have no impact on the market price of a stock.
💡 Solution & Explanation
The Modigliani-Miller theorem posits that within a frictionless financial market devoid of taxes and transaction costs, a firm capital structure has no impact on its overall market value. Real-world tax shields and market imperfections modify this theoretical baseline in corporate finance. Economic theories and principles are occasionally included in advanced competitive exams.
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