Chapter 16, Problem 6CQ

Summary Introduction

To answer: The given debate.

Introduction:

Modigliani-Miller theory:

Professors Modigliani and Miller made a research on capital structure theory very intensely. From the analysis, it is found that they formed a capital structure irrelevant proposal.

Debate:

There has been question raised and answer given for some questions regarding Modigliani-Miller Propositions. The questions are about equity increase, borrowing of debts and risk involved in the debts and equity. The final question raised was that, when a company uses equity or debt financing, and it is assumed that risk of both are raised by increasing in borrowing rate, so when there is a raise in the debt value and risk of the firm, will the company value decrease.