- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 6. Capital Structure
- Subject 3. Modigliani-Miller Capital Structure Propositions
CFA Practice Question
Which of the following would violate the assumptions necessary for the Modigliani and Miller (MM) capital structure irrelevance proposition?
B. There are no taxes.
C. There are no bankruptcy costs.
D. EBIT can be affected by the use of debt.
A. There are no transactions (brokerage) costs.
B. There are no taxes.
C. There are no bankruptcy costs.
D. EBIT can be affected by the use of debt.
Correct Answer: D
For the capital structure irrelevance proposition to hold, EBIT cannot be affected by the use of debt.
User Contributed Comments 4
| User | Comment |
|---|---|
| kalps | M&M assumptions - EBIT cannot be affected by debt/equity |
| xyz007 | assumption ---debt has no effect on EBIT |
| sarath | Assumptions - Perfect world ...no tax , no BKRPTCY, Symmetric info , EBIT not affected by debt, No transaction costs.... |
| alejandroc | No evil in the world, no corrupt politicians, no hunger, no global warming... |