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Miller and Modigliani’s propositions 1 and 2 imply that firms with different re-turns on equity may...

Miller and Modigliani’s propositions 1 and 2 imply that firms with different re-turns on equity may still be equally valuable. (True or False)?

Solutions

Expert Solution

TRUE

Under assumptions of Miller and Modigliani’s propositions 1 and 2:

  • Capital structure is irrelevant
  • Return on equity is a linear function of D/E
  • WACC is constant

Hence the firms can have different ROE due to different D/E, but may have same WACCC and hence valaution.

jeff jeffy answered 2 years ago
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