MM model assumes that there are no floatation costs and no time gaps are required in raising new equity capital . In the practical world, floatation costs must be incurred and legal formalities must be completed and then issues can be floated in the market.
Which of the following is an assumption of Modigliani and Miller model?
Solution(By Examveda Team)
Capital markets are perfect , Investors are assumed to be rational and behave accordingly and there is no corporate or personal income tax are the assumptions underlying the Miller and Modigliani analysis.
Which of the following is an assumption used in the Modigliani Miller theorem?
This assumption is a fundamental pillar of the theorem, because Modigliani and Miller argue that whether it is the firm borrowing money or the investor borrowing money and buying the firm’s shares, the end result remains unchanged.
Which of the following are the assumption that lie behind the Modigliani-Miller theory in a world without tax?
Assumptions of the Modigliani-Miller theory in a world without taxes: 1) Individuals can borrow at the same interest rate at which the firm borrows . ... Since interest payments are deductible, increasing debt reduces taxes and raises the value of the firm. 3) There are no costs of financial distress.
Which of the following is not an assumption of Modigliani-Miller theory?
Solution(By Examveda Team)
All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment.
What is the major assumption of pure MM theory?
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.
What are the assumptions of MM theory of capital structure?
The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value. Market value is determined by the present value of future earnings , the theorem states. The theorem has been highly influential since it was introduced in the 1950s.
Which of the following is an assumption of capital structure theories?
The capital structure theories use the following assumptions for simplicity: 1) The firm uses only two sources of funds: debt and equity . 2) The effects of taxes are ignored. 3) There is no change in investment decisions or in the firm’s total assets. 4) No income is retained.
What are the principles of capital structure?
Main concern of this principle is to earn maximum Earnings per share with minimum cost of financing . Interest rates and tax rates controls cost of financing. Debt capital is cheaper.
What are the types of financial decisions?
- Financing Decision: ...
- Investment Decision: ...
- Dividend Decision: ...
- Working Capital Decisions:
What is dividend irrelevance theory?
The dividend irrelevance theory holds that the markets perform efficiently so that any dividend payout will lead to a decline in the stock price by the amount of the dividend . ... As a result, holding the stock for the dividend achieves no gain since the stock price adjusts lower for the same amount of the payout.
What is traditional theory of capital structure?
The traditional theory of capital structure says that a firm’s value increases to a certain level of debt capital , after which it tends to remain constant and eventually begins to decrease if there is too much borrowing. ... A blend of equity and debt financing can lead to a firm’s optimal capital structure.
What is MM approach to the problem of capital structure?
The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income , apart from the risk involved in the investment. The theory stated that the value of the firm is not dependent on the choice of capital structure or financing decisions of the firm.
Which of the following is the main assumption of Walter valuation model?
Assumptions of Walter’s Model of the dividend policy include: Financing of the company’s requirements is done through the retained earnings, with no external financing . The rate of return (r) and the cost of capital (K) remain constant irrespective of any changes in the investments.
Which is the assumption of net operating income theories?
The NOI approach is based on following assumptions: (i) There are no corporate taxes. (ii) Cost of debt remains constant at all level of debt . (iii)Overall cost of capital remains constant.
Is also known as trading on equity?
Trading on equity is also called financial leverage . Both these terms signify that a corporate body leverages its financial standing to procure debt and enhance the earnings of shareholders.
