Define the capital structure of a firm and relate to the Modigliani and Miller (M&M) theory...

Define the capital structure of a firm and relate to the Modigliani and Miller (M&M) theory of capital structure. Do you feel the M&M theory is correct in its findings on the capital structure of a firm? Why or why not?

Expert Solution

Modigliani and Miller approach is always advocating that use of debt capital of equity capital will not be determining the value of the business because ultimately the value of a levered business and the unlevered business will be same, and when we will be taking the fact of the taxes than debt capital will be increasing the value of the overall business, so they will always be including a higher amount of debt capital into the overall capital structure of firm, as debt capital is tax deductible in nature.

No, I don't think that modigliani and Miller approach was correct in determination of capital structure because they were taking inappropriate assumptions like no transaction cost or tax free world but in actual there is a transaction cost and financial distress cost attached to the debt capital and Company can only take debt capital if they are in sound position to pay back, else it should lead to insolvency.

jeff jeffy answered 2 years ago

1. Explain Modigliani and Miller (M&M) Theory of Capital Structure under three special cases with the...

1. Explain Modigliani and Miller (M&M) Theory of Capital Structure under three special cases with the equations?

Explain the Modigliani & Miller (M&M) capital structure irrelevance principle

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The capital structure irrelevance theory proposed by Modigliani and Miller (MM) is often criticized to be...

The capital structure irrelevance theory proposed by Modigliani and Miller (MM) is often criticized to be based on very restrictive assumptions which are unrealistic in the world today. However, the theory is still considered extremely important. (word limit 400) a. Why it is important? b. Illustrate three main assumptions made by MM and discuss how the problems are tackled by alternative capital structure theories.

Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in...

Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in determining the value of a firm. Outline the arguments they used to reach their positions, including the assumptions underlying those arguments. With reference to relevant academic literature, discuss at least one reason why the M&M hypotheses might not hold in practice for BOTH dividend and capital structure policy.

Modigliani and Miller developed a theory describing a firm’s optimal capital structure, ranging from a basic...

Modigliani and Miller developed a theory describing a firm’s optimal capital structure, ranging from a basic model assuming no corporate taxes, to an intermediate model including corporate taxes, and ultimately a model providing for costs of financial distress. Do you agree or disagree that "all three models are practically applicable in the real world". Justify your comment

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it...

The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on the capital structure of a firm. The MM theorem represents what could possibly be the most important theory in respect of the effects of the Capital structure of a firm and the value of that firm. Despite the enormous efforts by Modigliani and Miller and the entire time spent by numerous scholars critiquing this theory, the MM...

Modigliani and miller demonstrated that "capital structure does not matter" in a perfect capital market. However,...

Modigliani and miller demonstrated that "capital structure does not matter" in a perfect capital market. However, this statement is at odds due to market imperfections. Explain how market imperfections reshape firm's choice of capital structure.

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Define the capital structure of a firm and relate to the Modigliani and Miller (M&M) theory...

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1. Explain Modigliani and Miller (M&M) Theory of Capital Structure under three special cases with the...

Explain the Modigliani & Miller (M&M) capital structure irrelevance principle

A- Discuss the traditional theory relating to capital structure and the approach by Modigliani and Miller

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Modigliani and Miller developed a theory describing a firm’s optimal capital structure, ranging from a basic...

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