Under the Modigliani-Miller theorem (MM propositions) with no taxes, managers cannot change the value of the firm by repackaging its securities because:

1. As debt is added, the equity becomes more risky: This means that as a company takes on more debt, the risk to equity holders increases. This is because debt holders have a higher claim on the company's assets and earnings. Therefore, the increased risk to equity holders can offset any potential increase in value from the added debt.

2. The overall cost of capital cannot be reduced: According to the MM propositions, the overall cost of capital of a firm is independent of its capital structure. This means that changing the mix of debt and equity does not affect the firm's weighted average cost of capital, and therefore does not change the value of the firm.

The other two options are not correct because under the MM propositions, capital structures are not fixed and debt can be cheaper than equity due to tax benefits (although this is not considered under the no-tax MM propositions).

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Under the Modigliani-Miller theorem (MM propositions) with no taxes, managers cannot change the value of the firm by repackaging its securities because:

1. As debt is added, the equity becomes more risky: This means that as a company takes on more debt, the risk to equity holders increases. This is because debt holders have a higher claim on the company's assets and earnings. Therefore, the increased risk to equity holders can offset any potential increase in value from the added debt.

2. The overall cost of capital cannot be reduced: According to the MM propositions, the overall cost of capital of a firm is independent of its capital structure. This means that changing the mix of debt and equity does not affect the firm's weighted average cost of capital, and therefore does not change the value of the firm.

The other two options are not correct because under the MM propositions, capital structures are not fixed and debt can be cheaper than equity due to tax benefits (although this is not considered under the no-tax MM propositions).

Knowee AI · Accepted Answer

Under the Modigliani-Miller theorem (MM propositions) with no taxes, managers cannot change the value of the firm by repackaging its securities because:

1. As debt is added, the equity becomes more risky: This means that as a company takes on more debt, the risk to equity holders increases. This is because debt holders have a higher claim on the company's assets and earnings. Therefore, the increased risk to equity holders can offset any potential increase in value from the added debt.

2. The overall cost of capital cannot be reduced: According to the MM propositions, the overall cost of capital of a firm is independent of its capital structure. This means that changing the mix of debt and equity does not affect the firm's weighted average cost of capital, and therefore does not change the value of the firm.

The other two options are not correct because under the MM propositions, capital structures are not fixed and debt can be cheaper than equity due to tax benefits (although this is not considered under the no-tax MM propositions).

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