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A firm operating in perfect capital markets has a capital structure consisting of 10% debt...

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Finance

A firm operating in perfect capital markets has a capital structure consisting of 10% debt and 90% equity. The firm's managers decide to "lever up" their company by borrowing a great deal of money and using the proceeds to retire most of the outstanding stock. After this recapitalization takes place, the capital structure weights are 90% debt and 10% equity. Which statement below is most likely to be false according to Modigliani and Miller?

Select one:

A.

The overall risk of the firm will be higher after the recapitalization than it was previously.

B.

The equity remaining in the firm after the recapitalization is much more risky than the equity that was in place before the recapitalization.

C.

After the firm increases debt from 10% to 90% of the firm's capital structure, the cost of debt will rise to reflect the increased risk of the company's debt.

D.

The value of the company will remain the same in spite of such a dramatic change in its capital structure.

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