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6. Modigliani and Miller assumptions In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporation's capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MM's algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MM's first study were changed by MM and other researchers as the theory of capital structure evolved. Which of the following statements are assumptions that Modigliani and Miller used in their initial (MM Proposition I) model and research paper? Check all that apply. Personal taxes offset the benefits derived by corporate taxes. Complete information is readily available to all investors and is free to all market participants. All investors are rational, and have the same expectations of a company's earnings (as measured by its EBIT). Stocks and bonds are traded in "perfect markets," such that there are no transaction (or brokerage) costs and all corporate and individual investors can borrow and lend at the same rate of interest. There are no costs associated with a bankruptcy. The cost of debt increases with the level of debt.

6. Modigliani and Miller assumptions In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporation's capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MM's algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MM's first study were changed by MM and other researchers as the theory of capital structure evolved. Which of the following statements are assumptions that Modigliani and Miller used in their initial (MM Proposition I) model and research paper? Check all that apply. Personal taxes offset the benefits derived by corporate taxes. Complete information is readily available to all investors and is free to all market participants. All investors are rational, and have the same expectations of a company's earnings (as measured by its EBIT). Stocks and bonds are traded in "perfect markets," such that there are no transaction (or brokerage) costs and all corporate and individual investors can borrow and lend at the same rate of interest. There are no costs associated with a bankruptcy. The cost of debt increases with the level of debt.

Auditing: A Risk Based-Approach (MindTap Course List)
Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter10: Auditing Cash, Marketable Securities, And Complex Financial Instruments
Section: Chapter Questions
Problem 40CYBK
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6. Modigliani and Miller assumptions In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporation's capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MM's algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MM's first study were changed by MM and other researchers as the theory of capital structure evolved. Which of the following statements are assumptions that Modigliani and Miller used in their initial (MM Proposition I) model and research paper? Check all that apply. Personal taxes offset the benefits derived by corporate taxes. Complete information is readily available to all investors and is free to all market participants. All investors are rational, and have the same expectations of a company's earnings (as measured by its EBIT). Stocks and bonds are traded in "perfect markets," such that there are no transaction (or brokerage) costs and all corporate and individual investors can borrow and lend at the same rate of interest. There are no costs associated with a bankruptcy. The cost of debt increases with the level of debt.
Transcribed Image Text:6. Modigliani and Miller assumptions In 1958 Franco Modigliani and Merton Miller (MM) published a set of research papers that revolutionized the theory of a corporation's capital structure. In their first research paper, MM proposed a set of assumptions that, on the surface, may seem unrealistic, but these assumptions and MM's algebraic approach provided the first significant attempt to study capital structure theory in a scientific fashion. The original assumptions that were used in MM's first study were changed by MM and other researchers as the theory of capital structure evolved. Which of the following statements are assumptions that Modigliani and Miller used in their initial (MM Proposition I) model and research paper? Check all that apply. Personal taxes offset the benefits derived by corporate taxes. Complete information is readily available to all investors and is free to all market participants. All investors are rational, and have the same expectations of a company's earnings (as measured by its EBIT). Stocks and bonds are traded in "perfect markets," such that there are no transaction (or brokerage) costs and all corporate and individual investors can borrow and lend at the same rate of interest. There are no costs associated with a bankruptcy. The cost of debt increases with the level of debt.
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