{"id":45327,"date":"2024-04-15T21:56:26","date_gmt":"2024-04-15T21:56:26","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=45327"},"modified":"2024-04-15T21:56:26","modified_gmt":"2024-04-15T21:56:26","slug":"which-of-the-following-is-are-false-regarding-capital-structure-theory-as-stated-by-miller-and-modigliani-1-if-agency-costs-are-considered-the-expected-agency-costs-increases-as-the-debt-equity-rat","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-is-are-false-regarding-capital-structure-theory-as-stated-by-miller-and-modigliani-1-if-agency-costs-are-considered-the-expected-agency-costs-increases-as-the-debt-equity-rat\/","title":{"rendered":"Which of the following is\/are false regarding capital structure theory as stated by Miller and Modigliani? 1) If agency costs are considered, the expected agency costs increases as the debt-equity ratio decreases. 2) With the given assumptions, there is no optimal capital structure. 3) In the presence of taxes, the market value of the firm decreases by the tax shield of debt"},"content":{"rendered":"<p>\r\n    <!-- Check if it's an AMP page -->\r\n            <!-- Non-AMP version -->\r\n        <div class=\"mcq-container\" data-quiz-id=\"quizState_6a971d89ec6f4\">\r\n                                            <div class=\"option\" data-option-key=\"option1\" data-is-correct=\"false\">\r\n                    Only 1st statement                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option2\" data-is-correct=\"false\">\r\n                    Only 2nd statement                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option3\" data-is-correct=\"true\">\r\n                    Both 1st and 3rd statements                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option4\" data-is-correct=\"false\">\r\n                    All the three statements.                <\/div>\r\n                            \r\n            <!-- Feedback messages for non-AMP -->\r\n            <div class=\"feedback\" data-feedback=\"wrong\">Answer is Right!<\/div>\r\n            <div class=\"feedback\" data-feedback=\"right\">Answer is Wrong!<\/div>\r\n        <\/div>\r\n\r\n        <script>\r\n        document.addEventListener('DOMContentLoaded', function () {\r\n            var containers = document.querySelectorAll('.mcq-container');\r\n\r\n            containers.forEach(function(container) {\r\n                var options = container.querySelectorAll('.option');\r\n                var feedbackSelect = container.querySelector('[data-feedback=\"select\"]');\r\n                var feedbackWrong = container.querySelector('[data-feedback=\"wrong\"]');\r\n                var feedbackRight = container.querySelector('[data-feedback=\"right\"]');\r\n\r\n                options.forEach(function(option) {\r\n                    option.addEventListener('click', function() {\r\n                        var selectedOption = option.getAttribute('data-option-key');\r\n                        var isCorrect = option.getAttribute('data-is-correct') === 'true';\r\n\r\n                        \/\/ Remove previous selections\r\n                        options.forEach(function(opt) {\r\n                            opt.classList.remove('correct', 'incorrect');\r\n                        });\r\n\r\n                        \/\/ Add the correct\/incorrect class\r\n                        if (isCorrect) {\r\n                            option.classList.add('correct');\r\n                            feedbackRight.hidden = false;\r\n                            feedbackWrong.hidden = true;\r\n                        } else {\r\n                            option.classList.add('incorrect');\r\n                            feedbackRight.hidden = true;\r\n                            feedbackWrong.hidden = false;\r\n                        }\r\n\r\n                        \/\/ Hide select feedback\r\n                        feedbackSelect.hidden = true;\r\n                    });\r\n                });\r\n            });\r\n        });\r\n        <\/script>\r\n    \r\n    <!--more--><\/p>\n<p>The correct answer is: <strong>C. Both 1st and 3rd statements<\/strong>.<\/p>\n<p>The MM proposition I states that in a perfect market, the value of a firm is independent of its capital structure. This means that the firm&#8217;s value is not affected by the amount of debt or equity it uses to finance its assets.<\/p>\n<p>The MM proposition II states that in a perfect market, the cost of capital is also independent of the firm&#8217;s capital structure. This means that the firm&#8217;s cost of capital is the same regardless of the amount of debt or equity it uses to finance its assets.<\/p>\n<p>However, these propositions are based on a number of assumptions, including the following:<\/p>\n<ul>\n<li>There are no taxes.<\/li>\n<li>There are no agency costs.<\/li>\n<li>There are no information asymmetries between managers and shareholders.<\/li>\n<li>There are no bankruptcy costs.<\/li>\n<\/ul>\n<p>If any of these assumptions are violated, then the MM propositions may not hold.<\/p>\n<p>For example, if there are taxes, then firms can use debt financing to reduce their tax liability. This means that the value of a firm with debt financing will be greater than the value of a firm with no debt financing.<\/p>\n<p>Similarly, if there are <div class=\"telegram-channel-container\">\r\n        <a href=\"https:\/\/t.me\/pscnotes2025\" target=\"_blank\" class=\"telegram-channel-button\">\r\n            <span class=\"telegram-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 496 512\">\r\n                    <path fill=\"white\" d=\"M248,8C111,8,0,119,0,256s111,248,248,248s248-111,248-248S385,8,248,8z M362,177L320,367c-3,14-10,18-20,14l-56-41l-27,26 c-3,3-5,5-10,5l4-63L323,196c5-5-1-7-8-3l-98,62l-42-13c-9-3-10-9,2-14l162-63C351,160,365,164,362,177z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Join Our Telegram Channel\r\n        <\/a>\r\n    <\/div> agency costs, then firms with more debt financing will have higher agency costs. This is because debt financing gives managers more power, which they may use to benefit themselves at the <div class=\"youtube-subscribe-container\">\r\n        <a href=\"https:\/\/www.youtube.com\/channel\/UCNHT8lW-JmLC68rjBfZhdkg?sub_confirmation=1\" target=\"_blank\" class=\"youtube-subscribe-button\">\r\n            <span class=\"youtube-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 576 512\">\r\n                    <path d=\"M549.7 124.1c-6.3-23.7-24.8-42.3-48.3-48.6C458.8 64 288 64 288 64S117.2 64 74.6 75.5c-23.5 6.3-42 24.9-48.3 48.6-11.4 42.9-11.4 132.3-11.4 132.3s0 89.4 11.4 132.3c6.3 23.7 24.8 41.5 48.3 47.8C117.2 448 288 448 288 448s170.8 0 213.4-11.5c23.5-6.3 42-24.2 48.3-47.8 11.4-42.9 11.4-132.3 11.4-132.3s0-89.4-11.4-132.3zm-317.5 213.5V175.2l142.7 81.2-142.7 81.2z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Subscribe on YouTube\r\n        <\/a>\r\n    <\/div> expense of shareholders.<\/p>\n<p>Therefore, both the first and third statements are false. The first statement is false because if there are agency costs, then the expected agency costs increases as the debt-equity ratio decreases. The third statement is false because in the presence of taxes, the market value of the firm increases by the tax shield of debt.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Join Our Telegram Channel Subscribe on YouTube<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Which of the following is\/are false regarding capital structure theory as stated by Miller and Modigliani? 1) If agency costs are considered, the expected agency costs increases as the debt-equity ratio decreases. 2) With the given assumptions, there is no optimal capital structure. 3) In the presence of taxes, the market value of the firm decreases by the tax shield of debt<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-is-are-false-regarding-capital-structure-theory-as-stated-by-miller-and-modigliani-1-if-agency-costs-are-considered-the-expected-agency-costs-increases-as-the-debt-equity-rat\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Which of the following is\/are false regarding capital structure theory as stated by Miller and Modigliani? 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