of the Modigliani-Miller Capital Structuring Theorems on the Relation between Equity and Debt1 Ruben D. Cohen 2‚3 Abstract We illustrate here the effects of the Modigliani-Miller theorems on capital structuring‚ emphasising especially on the relationship between equity and debt. This is carried out numerically via a simplified financial statement‚ which takes us through the methodology that leads to the ROE‚ WACC and firm’s value‚ all plotted against leverage. Introduction The Modigliani and Miller
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CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash
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affect the share of the earnings that pertain to the equity shareholders. Introduction to Capital Structure Theories There are 4 basic Capital Structure theories. They are: 1. Net Income Approach 2. Net Operating Income Approach 3. Modigliani-Miller (MM) Approach and 4. Traditional Approach Generally‚ the capital structure theories have the following assumptions: 1. There are no corporate taxes (this assumption has been removed later). 2. The firms use only 2 sources of financing namely
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Question 1 –Cost of Capital (15 marks) a) i) From Annual Report Adjusted net income=$3‚827 million Adjusted EPS=$3.82 Yes‚ shareholders should accept these figures. As mentioned in the annual report‚ management evaluates the components of adjusted net earnings based on an internal assessment of performance measures periodically. The adjusted net earnings enables investors and analysts to better understand the underlying operating performance or the company’s core mining business through the eyes of management
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optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price. Correct Answer: True Question 2 3 out of 3 points The dividend irrelevance theory‚ proposed by Miller and Modigliani‚ says that provided a firm pays at least some dividends‚ how much it pays does not affect either its cost of capital or its stock price. Correct Answer: False Question 3 3 out of 3 points MM’s dividend irrelevance theory says that
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Finance‚ 911-922. http://dx.doi.org/10.1111/j.1540-6261.1973.tb01415.x Mehra‚ Rajnish‚ & Prescott‚ Edward. (1985). The Equity Premium: A Puzzle. Journal of Monetary Economics‚ 145-161. http://dx.doi.org/10.1016/0304-3932(85)90061-3 Modigliani‚ Franco‚ & Metron Miller. (1958). The Cost of Capital‚ Corporation Finance‚ and the Theory of Investment. American Economic Review‚ 261-297. Myers‚ Stewart‚ & majluf Nicolas. (1984). CorporateFinancing and Investment Decisions When Firms Have Information That
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MM with capital structure In 1958‚ Modigliani and Merton Miller in their classical paper “The Cost of Capital‚ Corporation Finance and the Theory of Investment”‚ talked something about capital structure as follow: Consider any company j and let Xj stand as before for the expected return on the assets owned by the company (that is‚ its expected profit before deduction of interest). Denote by Di the market value of the debts of the company; by Sj the market value of its common shares; and by V j
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of a firm. Investors in a levered equity will require a higher expected return to compensate for its increased risk. Equity is less valuable with leverage‚ but this does not mean the firm is worse off (DeMarzo‚ 2011‚ p. 453). Franco Modigliani and Merton Miller (of MM Proposition I) state that with perfect capital markets‚ the value of a firm should not depend on its capital structure. They argue that in the absence of taxes or other transaction costs‚ the total cash flow paid out to all of the
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UNIT 5: FINAL PROJECT ASSIGNMENT (Complete) CAPITAL STRUCTURE ANALYSIS - GOOGLE‚ INC. Submitted to GB550: Financial Management Prof. Dale Prondzinski Prepared by Jason Kang MBA Candidate | Class of 2012i iiiiii Graduate School of Business | Kaplan University Online I fiii iand Management| GB540i fi iiiiiiiiiiiiiiii Apr 6‚ 2012 Jason’s Portfolio Note on April 16‚ 2012: The course project involved developing a great depth of knowledge in analyzing capital structure
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Question The dividend discount model tells us that the value of a firm is equal to the present value of its expected dividend payments. Some firms have never paid dividends and have no intention of doing so. Does this mean that these firms are worth nothing? Discuss with reference to academic research and theory. Answer 719 words Two schools about dividend policy: relevant dividend theory and irrelevant dividend theory The dividend discount model tells us the value of a firm is
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