What is MM theory with no tax?

The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the enterprise value of a firm is unaffected by how that firm is financed. …

What is MM proposition I and II without taxes?

MM Proposition I (without taxes): The market value of the company is not affected by the capital structure of the company. VL = VU. MM Proposition II (without taxes): The cost of equity is a linear function of the company’s debt/equity ratio.

What are the implications of the MM hypothesis with taxes?

The implication of M&M theory with tax is that the capital structure is no longer irrelevant. The value of a company with debt is higher than the value of a company with no or lower debt.

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.

Why does MM Proposition I without taxes not hold in the presence of corporate taxation?

The reason that MM Proposition I does not hold in the presence of corporate taxation is because: Levered firms pay less taxes compared with identical unlevered firms. Bryan invested in company when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure.

What is MM hypothesis?

The MM Hypothesis reveals that if more debt is included in the capital structure of a firm, the same will not increase its value as the benefits of cheaper debt capital are exactly set off by the corresponding increase in the cost of equity, although debt capital is less expensive than the equity capital.

Why does MM theory with taxes lead to 100 debt?

Why does the MM theory with corporate taxes lead to 100% debt? says that the value of a levered firm is equal to the value of an unlevered firm plus the value of any side effects, which include the tax shield and the expected costs due to financial distress.

What are the assumptions of the MM approach?

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.

What do you mean by financially leveraged?

Financial leverage is the use of debt to buy more assets. Leverage is employed to increase the return on equity. … The financial leverage formula is measured as the ratio of total debt to total assets. As the proportion of debt to assets increases, so too does the amount of financial leverage.

Which is not the assumption of MM theories?

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 MM approach to the problem of capital structure under what assumption of their conclusion hold good?

The Modigliani and Miller Approach indicates that the value of a leveraged firm (a firm that has a mix of debt and equity) is the same as the value of an unleveraged firm (a firm that is wholly financed by equity). If the operating profits and future prospects are the same.

Which of the following assumptions is necessary for MM Proposition I to hold?

Which of the following assumptions is necessary for MM Proposition I to hold? Individuals can borrow on their own at an interest rate equal to that of the firm.

Which is not true for MM model?

If ke = r, then under Walter’s Model, which of the following is irrelevant?
…
Q. Which of the following is not true for MM Model?
B. share price goes down if dividend is not paid,
C. market value is unaffected by dividend policy,
D. all of the above.
Answer» c. market value is unaffected by dividend policy,

What is arbitrage process under mm hypothesis?

Arbitrage process: It is the process facilitates the individual investors to buy the investments at lower price at one market and sells them off at higher price in another market. … During this process, the investor could save something and this continuous arbitrage process will level the value of the both firms.

What is MM hypothesis in dividend policy?

Definition: According to Miller and Modigliani Hypothesis or MM Approach, dividend policy has no effect on the price of the shares of the firm and believes that it is the investment policy that increases the firm’s share value.

Which is the objective of financial management?

The basic objective of financial management is to achieve optimal profit, both in the short and long run. It even includes wealth maximization, where every shareholder’s value or hold over dividends should increase.

Which is the importance of the concept of cost of capital Mcq?

Cost of Capital is the expected returns from a project, based on which the management of an organisation decides to invest in a project. It evaluates the risk of undertaking a particular project, and the expected rate of return on the investment, to determine the feasibility of spending their time and money on it.

Which of the following is not true in context of dividend decision?

Which one of the following is not true about dividend decision? Payment of dividend involves legal as well as financial consideration. Dividends can be paid only when there are profits. Dividends can be paid when there are losses.

Why financial management is important?

Financial management is extremely important during this time. … As a business grows and matures, it will need more cash to finance its growth. Planning and budgeting for these financial needs is crucial. Deciding whether to fund expansion internally or borrow from outside lenders is a decision made by financial managers.

What is finance explain the importance of financial management?

Financial management provides pathways to attain goals and objectives in an organisation. The main duty of a financial manager is to measure organisational efficiency through proper allocation, acquisition and management. … It helps business firm to take financial decisions.

What is financial management and its importance?

Financial management is strategic planning, organising, directing, and controlling of financial undertakings in an organisation or an institute. It also includes applying management principles to the financial assets of an organisation, while also playing an important part in fiscal management.