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: D. Operating investment decisions
- A. Dividend payment schedule
- B. Short-term borrowing policy
- C. Debt-to-equity ratio
- D. Operating investment decisions
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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