Explain Propositions 1 and 2 from Modigliani and Miller’s theory of capital structure when there are no taxes. Modigliani and Miller originally stated that a company's value does not depend on the fraction of how it is financed, regardless of whether the company's capital holds as debt or equities, or a combination of these. Assumptions of M-M Approach 3. They exert tremendous influence on financial research and financial practices. M-M Approach with Corporate Taxes and Capital Structure. Explain the three selfish strategies that we discussed in class. The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. In fact, I suggest that MM I is even more applicable to closely held private equity than El Teorema de Modigliani y Miller estudia la relacion entre el valor de una empresa y su estructura de financiacion (Acciones y Deudas), a traves del distinto efecto que tienen los impuestos segun que fuente de financiacion empleemos A proposition by Modigliani and Miller which states that the cost of equity is a linear function of the firm's debt/equity-ratio. I & MM II (Modigliani-Miller Proposition I and II). How do these change when corporate taxes are added? The theorem was basically The M&M theorem holds that the average cost of capital to the firm
The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.
3. M-M Approach with Corporate Taxes and Capital Structure. Home › Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA Advanced Financial Management (AFM) Exams › Modigliani and Miller Proposition 2 (with tax) formula This topic has 9 replies, 6 voices, and was last updated 2 years, 7 months ago by John Moffat . Financial distress costs are significant and can lead to shareholders engaging in selfish behaviors.
Modigliani and Miller propositions form the theoretical foundation of corporate finance and asset valuation. Modigliani and Miller Proposition II. Proposition of M-M Approach 2. Their proof follows a basic "If A then B" logic. However their proposition are base on certain assumption and particularly relate to the behaviour of investors, capital market, the actions of the firm and the tax environment. The first is substantive and it stems from their nature of “irrelevance propositions”: by providing a crystal-clear benchmark case where capital structure and dividend policy do not affect firm value, by implication these propositions help us The purpose of this article is to serve as a brief and very informal 1 review of MM I & II, and why they are still so important to the understanding of business valuation. 2. Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks William R. Cline Abstract Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The Modigliani-Miller (MM) theorems are a cornerstone of finance for two reasons. After reading this article you will learn about Modigliani-Miller (M-M) Approach:- 1. Most Popular Terms: 1. Modigliani & Miller’s theory (often referred to as M&M or MM ) is encountered by every finance student in the introduction to finance or … Modigliani & Miller’s revelations on the impact of capital structure on a company’s value and cost of equity was pathbreaking in the world of finance. Modigliani and Miller Proposition (version 2) Version 1 of the M&M proposition implies that given a set of assumptions (i.e., conditions) capital structure does not matter (i.e., it is irrelevant). Modigliani and Miller propositions as documented in theACCA AFM (P4) textbook. The Modigliani-Miller theorem can be best explained in terms of their proposition 1 and proposition 2.
An introduction to ACCA AFM (P4) B3h.