Match the items of List – I with the items of List – II : List – I List – II a. M.M. Hypothesis without…
Modigliani-Miller (M-M) hypothesis without taxes states that firm value and overall cost of capital are invariant to leverage (ii), the Net Operating Income (NOI) approach…
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Match the items of List – I with the items of List – II :
List – I
List – II a. M.M. Hypothesis without taxes i. The cost of debt and cost of equity are assumed to be independent to the capital structure. b. Net operating income approach ii. In the absence of taxes a firm’s market value and the cost of capital remain invariant to the capital structure changes. c. M.M. Hypothesis under corporate taxes
iii. The cost of equity is assumed to increase linearly with leverage. d. Net income approach
iv. The value of the firm will increase with debt due to the deductibility of interest charges for tax computations and the value of the levered firm will be higher than the unlevered firm.
Answer and explanation
Correct answer A
Modigliani-Miller (M-M) hypothesis without taxes states that firm value and overall cost of capital are invariant to leverage (ii), the Net Operating Income (NOI) approach assumes cost of equity increases linearly with leverage keeping overall cost constant (iii), M-M with corporate taxes holds that levered firm value increases due to the interest tax shield (iv), and the Net Income (NI) approach assumes cost of debt and equity remain independent of capital structure (i).
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UGC NET Management