{"id":57482,"date":"2024-04-16T01:02:46","date_gmt":"2024-04-16T01:02:46","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=57482"},"modified":"2024-04-16T01:02:46","modified_gmt":"2024-04-16T01:02:46","slug":"in-mm-model-irrelevance-of-capital-structure-is-based-on","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/in-mm-model-irrelevance-of-capital-structure-is-based-on\/","title":{"rendered":"In MM-Model, irrelevance of capital structure is based on:"},"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_6a973b15f1d60\">\r\n                                            <div class=\"option\" data-option-key=\"option1\" data-is-correct=\"false\">\r\n                    Cost of Debt and Equity                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option2\" data-is-correct=\"false\">\r\n                    Arbitrage Process                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option3\" data-is-correct=\"false\">\r\n                    Decreasing k0                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option4\" data-is-correct=\"true\">\r\n                    All of the above                <\/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>D. All of the above<\/strong><\/p>\n<p>The Modigliani-Miller (MM) irrelevance proposition states that in a perfect <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> market, the capital structure of <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> a firm does not affect its value. This is because investors can create their own homemade leverage by borrowing money on their own to purchase shares in the firm. This arbitrage process will drive the cost of equity up or down until the value of the firm is unaffected by its capital structure.<\/p>\n<p>The cost of debt is the interest rate that a firm pays on its outstanding debt. The cost of equity is the rate of return that investors expect to earn on their investment in the firm. The weighted average cost of capital (WACC) is a measure of the overall cost of capital for a firm, and it is calculated by taking a weighted average of the cost of debt and the cost of equity.<\/p>\n<p>The MM irrelevance proposition is based on the following assumptions:<\/p>\n<ul>\n<li>There are no taxes.<\/li>\n<li>There are no transaction costs.<\/li>\n<li>There are no information asymmetries.<\/li>\n<li>Investors are rational and have homogeneous expectations.<\/li>\n<li>The firm is a going concern.<\/li>\n<\/ul>\n<p>If any of these assumptions are violated, then the MM irrelevance proposition may not hold. For example, if there are taxes, then the cost of debt will be lower than the cost of equity, and the firm will benefit from using debt financing.<\/p>\n<p>The MM irrelevance proposition has important implications for corporate finance. It suggests that firms should not worry about their capital structure, and they should focus on maximizing their operating profits. However, the MM irrelevance proposition is based on a number of unrealistic assumptions, and it may not hold in the real world.<\/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>In MM-Model, irrelevance of capital structure is based on:<\/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\/in-mm-model-irrelevance-of-capital-structure-is-based-on\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" 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