MM Propositions with taxes

问题如下：

Under Modigliani and Miller (MM), if one assumes no taxes and no financial distress cost, among other assumptions, the value of the company is:

选项：

A.determined by its capital structure. B.determined solely by its expected future cash flows. C.set so the value of levered company is greater than that of the unlevered company.

解释：

Correct Answer: B

B is correct. MM showed that under a set of restrictive assumptions, including zero taxes, the firm’s value is unaffected by its financing mix or capital structure. It is the firm’s cash flow that is the primary determinant of value. If the market value of the company is not affected by its financing mix, then the value of the levered firm is equal to the value of the unlevered firm.