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 not an assumption of MM model?
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 basic assumptions 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.
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.
Why is MM theory important?
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.
How do you calculate mm approach?
The expected return on equity of Firm A can be calculated based on the following formula:
RE Firm A = RE Firm B + D/E *(RE Firm B – RD)
. Firm A is a levered firm and Firm B is an unlevered firm. Let’s assume a debt to equity ratio of 40:60.
What are the two types of financial decisions?
- Financing Decision: …
- Investment Decision: …
- Dividend Decision: …
- Working Capital Decisions:
Why is Modigliani and Miller approach unrealistic?
The Modigliani and Miller theories are based on
several unrealistic assumptions about debt financing
. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm.
What is MM perfect market hypothesis?
The efficient market hypothesis (EMH) or
theory states that share prices reflect all information
. The EMH hypothesizes that stocks trade at their fair market value on exchanges. … Opponents of EMH believe that it is possible to beat the market and that stocks can deviate from their fair market values.
What are the capital structure theories?
In financial management, capital structure theory refers to
a systematic approach to financing business activities through a combination of equities and liabilities
.
What are the forms of capital structure?
- Equity Capital. Equity capital is the money owned by the shareholders or owners. …
- Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business. …
- Optimal Capital Structure. …
- Financial Leverage. …
- Importance of Capital Structure.
What are the factors affecting capital structure?
Factors Affecting Capital Structure –
Profitability, Cost of Capital, Nature of Business of Firm, Cash Flows, Control of Firm, Capital Market Conditions
and a Few Others. The main factors affecting the capital structure of a firm are mentioned below: 1.
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.
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.
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.
