Under the Modigliani and Miller proposition for capital structure in a perfect market without taxes or bankruptcy costs, the value of a firm is primarily determined by its:
Correct answer: B. Operating investment decisions
- A. Dividend payment schedule
- B. Operating investment decisions
- C. Debt-to-equity ratio
- D. Short-term borrowing policy
Explanation
In the basic Modigliani and Miller model, financing mix does not determine firm value under the stated ideal conditions. The value is determined by the firm's operating assets and investment decisions, while real-world taxes and financial distress can change this conclusion.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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