solution
Which of the following capital structure theories predict a fixed optimal capital structure?
Asymmetric Information Theory
The Miller and Modigliani Theory
The Timing Theory
All of the above
None of the above
According to Miller and Modigliani, capital structure is irrelevant in a perfect world. This is because as a firm substitutes debt for equity (borrows funds! I and retires equity),
the overall firm risk will increase leaving the WACC unchanged.
the higher cost of equity will offset the lower cost of debt, leaving the WACC and firm value unchanged.
shareholders will require a lower rate of return, offsetting the higher cost of debt.
The overall firm risk will decline leaving the WACC unchanged.
None of the above
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