Answer: the same WACC.

## Explanation According to Modigliani and Miller's Proposition I without taxes, the value of a firm is independent of its capital structure. This means that changing the proportion of debt in the capital structure does not affect the overall value of the company. **Key points of MM Proposition I (without taxes):** 1. **Capital structure irrelevance**: The market value of a firm is determined by its operating income and the risk of its underlying assets, not by how it is financed. 2. **WACC remains constant**: As a firm increases its debt, the cost of equity rises exactly enough to offset the benefit of using cheaper debt, keeping the weighted average cost of capital (WACC) unchanged. 3. **No arbitrage opportunity**: Investors can create homemade leverage to achieve any desired capital structure, so firm-level leverage doesn't create value. **Why the other options are incorrect:** - **Option B (a lower cost of equity)**: Actually, according to MM Proposition II without taxes, as debt increases, the cost of equity rises linearly with the debt-to-equity ratio due to increased financial risk. - **Option C (a greater company value)**: Without taxes, there is no tax shield benefit from debt, so company value remains unchanged regardless of capital structure. **Mathematical representation:** - **Proposition I**: Vᴜ = Vʟ (Value of unlevered firm = Value of levered firm) - **Proposition II**: rᴇ = r₀ + (r₀ - rᴅ) × (D/E) Where: rᴇ = cost of equity, r₀ = cost of capital for unlevered firm, rᴅ = cost of debt, D/E = debt-to-equity ratio Therefore, the correct answer is **A** - the same WACC.

Author: LeetQuiz .