Proposition I without Taxes: Capital Structure Irrelevance
{"Image DocumentName": "Proposition I without Taxes: Capital Structure Irrelevance", "Image ImageDescription": "Based on the assumptions that there are no taxes, costs of financial distress, or agency costs, so investors would value firms with the same cash flows as the same, regardless of how the firms are financed. Reasoning: There is no benefit to borrowing at the firm level because there is no interest deductibility. Firms would be indifferent to the source of capital and investors could use financial leverage if they wish. MM Proposition I. The market value of a company is not affected by the capital structure of the company. LOS: Explain the Modigliani\u2013Miller propositions concerning capital structure, including the impact of leverage, taxes, financial distress, agency costs, and asymmetric information on a company\u2019s cost of equity, cost of capital, and optimal capital structure. Page 201\u2013202, 204. Proposition I without Taxes: Capital Structure Irrelevance. Same set of cash flows \u2192 Same valuation (See Leverkin Company example, p. 204). You can see this proposition by capitalizing EBIT (that is, value of the firm = EBIT \uf0b8 WACC). Bottom line: There is no benefit to using debt versus equity. Copyright \u00a9 2013 CFA Institute.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}