Which of the following is CORRECT about M&M theory on capital structure? A) In a perfect...
- Which of the following is CORRECT about M&M theory on capital structure?
A) In a perfect MM world, capital structure does not matter for equity risk.
B) In a perfect MM world, higher leverage leads to a higher firm value.
C) In a MM world with only corporate tax, capital structure does not matter for equity risk.
D) In a MM world with only corporate tax, higher leverage leads to a higher firm value.
Homework Answers
In a perfect world, MM theory states that capital structure does not matter for the value of the firm. In a perfect MM world, higher leverage does not lead to a higher firm value.
In a MM world, where there exists corporate taxes, the capital structure matters and an increasing leverage leads to an increase in the value of the firm.
So, the correct option is option D.
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Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal capital structure theories
QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...
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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....
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