Business Studies · Capital Structure Theories
Which of the following statements correctly compares the traditional view of capital structure with the Modigliani-Miller (MM) theory without taxes?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The traditional view considers all increases in debt to be risk-free, while MM theory assumes debt always increases the risk of immediate bankruptcy.
- 2The traditional view claims that firm value is independent of leverage, while MM theory suggests that firm value increases as more equity is used.
- 3The traditional view states that an optimal capital structure exists that minimizes WACC, whereas MM theory argues that WACC remains constant regardless of the leverage level.✓
- 4The traditional view assumes perfect capital markets, while MM theory assumes market imperfections such as taxes and transaction costs.
Correct answer
The traditional view states that an optimal capital structure exists that minimizes WACC, whereas MM theory argues that WACC remains constant regardless of the leverage level.
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