MODIGLIANI – MILLER (MM): IRRELEVANCE OF CAPITAL STRUCTURE A. Firm Value and Capital Structure: • Modigliani-Miller (MM) Proposition I: The value of the firm is independent of the capital structure of the firm UNDER certain assumptions.
– 1st Arbitrage Proof in Finance: – Concept of Homemade Leverage...
& Miller, MM1 proposition Modigliani & Miller, MM2 “anomaly”: Tax (MM + corporate tax) “anomaly”: Income Tax (MM + all tax) “view I”: Insolvency costs (Static Trade off theory) “view II” A “ i II”: Agency costs t “view III”: Pecking order theory
Neo-classical finance theory
• A company is regarded...
believes that capital structure is not relevant.
7.6 Terminal Questions
1. What are the assumptions of MM approach?
2. The following data are available in respect of 2 firms. What is the average cost of capital?
3. Two companies are identical in all respects in all aspects except the debt...
:- Explain the ageing schedule in the context of monitoring of receivables.
Q5:- Explain the principle of trading on equity.
Q6:- Explain briefly the accounts receivable systems.
Cost of capital & Capital-Structure
Q1:- (*)State assumption of Modigliani and miller approach to cost of capital
Q2...
) show that under a restrictive set of assumptions that a firm’s value is unaffected by its capital structure. Which of the following are not assumptions used by MM?
a. no brokerage costs, no taxes, and no bankruptcy costs
Incorrect. Modigliani and Miller (MM) reach their irrelevance by assuming...
, 1988:99-120) who, using economic theory established the well-known
~8~
Modigliani and Miller propositions I and II (hereafter referred to as MM I and MM II, respectively). In developing their propositions the following assumptions were made: Capital markets are perfect; o No one person has...
releasing the assumptions made by MM, in particular by taking
into account corporate taxes (Modigliani and Miller, 1963), personal taxes (Miller, 1977),
bankruptcy costs (Stiglitz, 1972; Titman, 1984), agency costs (Jensen and Meckling, 1976;
Myers, 1977), and informational asymmetries (Donaldson, 1961...
us that Ko decreases with leverage in the beginning, reaches its maximum point and further increases. Miller and Modigliani Approach also believes that capital structure is not relevant. Terminal Questions 1. What are the assumptions of MM approach? 2. The following data are available in...
policy and the manner in which the earnings stream is split between retained earnings. Dividend payments therefore do not affect the value of a firm.
Modigliani and Miller demonstrated that under a particular set of assumptions set out below if a firm pays high dividends then it must issue new...
proposition: The MM argue that no matter what composition a firm resort to for its financing activities the overall cost of capital would remain unaltered presented through the net operating income approach . The theory of MM is based on three main propositions and the assumptions underlying are: presence...
representation
2.3.2 Conclusion
3 Irrelevance of dividend policy
3.1 Residuals theory of dividends
3.1.1 Extension of the theory
3.1.2 Conclusion
3.2 Modigliani-Miller theorem
3.2.1 Assumptions of the MM theorem
3.2.2 Model description
4 See also
5 External links
6 References
Concept
Coming...
.
Assignment B
1. What are the assumptions of MM(ModiglianiMiller) approach?
Ans) The Modigliani-Miller theorem is a key pillar in modern finance. The theorem has revolutionized corporate finance since it was introduced by the Professors Franco Modigliani and Merton Miller. In 1985, Modigliani was...
concluded that Glee PLC is in need of a balanced capital structure, such as the one proposed by Modigliani and Miller (MM Theorem with tax), to help lower its cost of capital that will result in increasing the company’s value. Also, it was concluded that the Net Present Value method of appraising...
: bbc@iimcal.ac.in
5
Theories of Capital Structure
• • Modigliani and Miller (MM) model Trade-off model
B.B.Chakrabarti: bbc@iimcal.ac.in
6
Modigliani and Miller (MM) Model
• MM model without corporate taxes (1958) - MM Proposition I : The Pie Model - MM Proposition II : The Cost of...
. Corporate tax is at the rate of 28 percent. All profits are paid out as dividends.
Using the assumptions of Modigliani and Miller, explain and demonstrate how this change in capital structure will affect Aloha’s:
i) cost of equity
ii) weighted average cost of capital
iii) market...
suggested that the supply of capital is frictionless. This assumption is consistent with the Modigliani and Miller theory; however, in reality firms might not always have the possibility to secure the desired loans. Recent research has suggested that the supply of capital play an important role in the...
to
the
use
of
debt?
>
Cost
to
prevent
aggressive
borrowing
• MMassumptions
realistic?
>
Not
in
practice
Pos.
corr.
btw
kLD
and
D/E
Topic
6:
Beyond
Modigliani/Miller...
. According to MM proposition I, the value of firm is the determined by the value of assets and cash flow generated by them instead of value of equity and debts. Supporting this argument Modigliani and Miller state that the capital raised to finance firm’s assets is not worth more than market value of...
Approach
Limitations of MM Hypothesis Assignment Help, Tutor Help
Modigliani Millar Approach
Modigliani Millar approach, popularly known as the MM approach is similar to the Net operating income approach. The MM approach favors the Net operating income approach and agrees with the fact that...