1] | The proposition is Modigliani Millers-Proposition II. |
2] | rE = Cost of levered equity |
rO = Cost of ulevered equity | |
rD = Cost of debt | |
D/E = Debt to equity ratio | |
3] | The proposition states that a company's cost of |
equity is directly proportional to the extent of debt | |
[leverage] in its capital structure. Higher level of debt | |
increase the probability of bankruptcy and hence, the | |
equity investors tend to demand higher return. |
In the context of a firm's capital structure decisions, a famous proposition by Modigliani and Miller...
What are the main assumptions and the basic conclusion of the original Modigliani and Miller proposition on the capital structure? Explain. short and correct answer please
8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms with a higher proportion of...
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
Capital Structure Theory Modern capital structure theory began in 1958 when Professors Modigliani and Miller (MM) published a paper that proved under a restrictive set of assumptions that a firm's value is unaffected by its capital structure. By indicating the conditions under which capital structure is irrelevant, they provided dues about what is required to make capital structure relevant and impact a firm's value. In 1963 they wrote a paper that included the impact of corporate taxes on capital structure....
According to Modigliani and Miller (MM)'s basic theory of capital structure, which of the following is considered when determining the value of a firm? A.Tax deductible interest B.Personal income taxes C. Brokerage costs D.Bankruptcy costs E. Retained earning The cost of debt to the firm is adjusted for _____. A.marginal revenue generated B. taxes C. interest rate D. internal rate of return E. return to investors A_____ is an action taken by a firm to decrease the per-share price of...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not affect the cost of capital B. Higher leverage increase the cost of equity C. Higher leverage does not affect the WACC D. Higher leverage does not affect the cost of equity Which of the following is not an advantage of having large shareholders? A. Better coordination in monitoring management B. Executives more likely to be dismissed when underperforming C. Less shareholders' interference in the...
What are business risk and financial risk? How do each influence the firm's capital structure decisions?
Capital Budgeting Decisions A college intem working at Anderson Paints evaluated potential investments using the firm's average required rate of return (n) as the discount role in the evaluation process and he produced the following report for you as the capital budgeting manager at Anderson Paints Project NPV IRR Risk LOM $1.500 12.5% High 11.0 Low (800) 10.0 Average DOG (150) 9.5 Low QUE YUP As the capital investment manager you must account for the risks associated with capital budgeting...
Tom is interested in gaining additional insights into capital structure issues and has asked Walt to brief him in the area. He wants a basic review of the terminology but is particularly interested in the impact of different types of risk and in understanding of the better-known financial theorists. Walt knew that Tom could grasp complex issues quickly and felt that a thorough discussion of Modigliani and Miller’s work would be appropriate. He also felt that Miller’s addition of personal...