The Nobel Prize-winning Modigliani & Miller Theory states that a firm’s capital structure does not matter.  It is based on three key assumptions: No income taxes Equal borrowing cost- individuals can borrow at the same interest rate as corporations. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs. Are these assumptions reasonable? What are the implications if the assumptions do not hold?

Q: The Modigliani and Miller theories are based on several unrealistic assumptions about debt…

A: The capital structure refers to the combination of debt and equity which is used in financing its…

Q: Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy…

A: Source of raising capital include: Equity financing Debt financing Loans from financial…

Q: Kidman corporation is trying to raise capital. What method would be the least risky to raise capital…

A: The credit ratings provide information about the creditworthiness of a company or an individual.

Q: onsider the following statements: The main lesson to be learned from the Modigliani and Miller…

A: Modigliani and Miller theory of capital structure suggests that the value of firm is irrelevant to…

Q: One of the indirect costs of financial distress is having to sell assets at lower than market value.…

A: Indirect costs of financial distress is not the directly present cost in the financial statements…

Q: Behavioural finance specialist may concede that there are no easy profits but argue that arbitrage…

A: When the goods and services cannot be availed at no cost it is known as the no free lunch principle.…

Q: Agency costs of debt arise any time there is a conflict between lender interests and borrower…

A: First let us define agency costs. Agency costs in the context of debt refer to the potential…

Q: What does the MM theory with no taxes state about the valueof a levered firm versus the value of an…

A: Introduction: The Modigliani Miller theorem is an important element in economic theory; it states…

Q: Are there firms not subject to the capital market constraint? What types of firms/organizations are…

A: Capital markets Capital markets are for raising funding for a firm so as to be used for growth or…

Q: The M&M Model of Modigliani and Miller is based upon the assumptions that: C. Capital markets are…

A: Corporate finance is referred as the decision of the firm to take capital investments and other…

Q: An abnormal return occurs:   Only when the actual return is lower than the expected return. Only…

A: A market is said to be efficient, if intrinsic Value of the Security is equal to Market price of the…

Q: What were the direct and indirect costs of the LIBOR scandal for Barclays? Are these costs only a…

A: The LIBOR Scandal: The LIBOR Scandal came to light in 2012 when Barclays and other banks admitted…

Q: Since NFPOs do not have as an objective making a profit for their own- ers, why should they be…

A: Not-for-profit organizations, also known as non-profit organizations, are entities that are…

Q: Ch. 14. Which one of the following is NOT an implication of market efficiency for corporate finance?…

A: market efficiency for corporate finance has Four implications

Q: Why can an M&A fail? O a. Economies of scale O b. shortcomings of the due diligence process,…

A: In general terms merger and acquisition refers to the consolidation of assets of 2 or more entities.…

Q: 1. Which of the following statements about the static trade-off theory of capital structure with…

A: The static trade-off theory of capital structure is a financial theory that suggests that a…

Q: The MM irrelevance capital structure theory proved that a firm’s value is unaffected by its capital…

A: The MM irrelevance capital structure theory states that a firm’s valuation is unaffected by its…

Q: FASB allows debt to be shown at its fair market value. Consequently, if a company in financial…

A: Financial Accounting Standards Board (FASB) The FASB, located in Norwalk, Connecticut, is an…

Q: Profitable projects are difficult to find.    a. Efficient capital markets b. The curse of…

A: Profitable project are difficult to find just because of severe competition world wise, because in…

Q: A company's market value is generally less than its book value. True of Falses ?

A: Fixed Assets are the Non-current portion of the assets that disclosed in the assets section of the…

Q: 12. Which of the following statements is FALSE? A) The Law of One Price implies that leverage will…

A: Leverage is referred as the usage of the debt or borrowed capital, which helps in undertaking the…

Q: If we drop the assumption that there are no information and transaction costs, in addition to…

A: As per Modigliani and Miller model, capital structure is relevant in valuing a company when there is…

Q: Assume we are in a M&M frictionless world EXCEPT that we have bankruptcy costs only. Under these…

A: In the Modigliani and Miller (M&M) propositions without taxes and other frictions, capital…

Q: Which of the following is NOT the assumptions of Modigliani and Miller without tax theory?   A.…

A: The MM theory is one of back bone of valuation of firms and valuation of the equity and but there…

Q: Many firms still use the internal rate of return rule instead of net present value. When used…

A: The net present value (NPV) and internal rate of return (IRR) are the methods that are used for the…

Q: Why do most analysts recommend against having a capital structure of zero debt?

A: Capital Structure of a firm is the mix of debt and equity which it uses to finance its operations or…

Q: There are two significant benefits of obtaining a loan over investing capital: Select one: a. banks…

A: Loan is defined as the funds, which used to be given to some other party in an exchange regarding…

Q: Which of the following statements is correct? a. As Modigliani and Miller made clear in their…

A: The capital structure indicated an appropriate mixture of equity and debts in the company where the…

Q: Select all that is not true about capital structure theory (MM theory). (2 answers)       Under…

A: As per MM hypothesis 1, there are no corporate taxes. This hypothesis states that the level of debt…

Q: If the financial market is frictionless, the cost of equity is higher than the cost of debt in all…

A: A financial market is a place where people may exchange low-cost financial securities and…

Q: Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm…

A: Modigliani and Miller's approach (M&M) states that the valuation of a firm is independent of the…

Q: What method would be the least risky to raise capital if it has a less-than-favorable credit rating?

A: K Corporation is trying to raise capital. Capital is needed by any company for growth purpose. So K…

Q: The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming…

A: Modigliani – Miller theory has following assumptions- There exist a perfect capital market, and…

Q: Explain the Answer

A: Yes, it is possible for a business to have both negative accounting profit and negative economic…

Q: Much capital structure theory focusses upon minimising agency costs, taxes, and bankruptcy costs. It…

A: capital structure theory says that for any company or investment there is an optimal mix of debt and…

Q: Which of the follwong is a true statement about Risk Capital or Owner's Equity? There is no legal…

A: Onwer's equity is sometimes known as risk capital because the equity owner's will get the dividends…

Q: Which one of the following is NOT an implication of market efficiency for corporate finance?

A: Since you have posted multiple independent questions in the same request, we will solve the first…

Q: 4. Which of the following is false about the risk-shifting problem? Risk-shifting leads to a…

A: Risk shifting is an agency problem which arises when the company takes more debt thereby increasing…

Q: 1 which is INCORRECT about a perfect capital market? there is no financial frictions such as…

A: The perfect market is defined as the market under which there are never any opportunities of…