What is the major assumption of pure MM theory?

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 enterprise value of a firm is unaffected by how that firm is financed.

What is MM’s proposition 1?

Miller and Modigliani theory mentions two propositions. Proposition I states that the market value of any firm is independent of the amount of debt or equity in capital structure. Proposition II states that the cost of equity is directly related and incremental to the percentage of debt in capital structure.

What is Modigliani-Miller irrelevance hypothesis critically evaluate its assumptions?

Modigliani – Miller’s theory is a major proponent of the ‘Dividend Irrelevance’ notion. According to this concept, investors do not pay any importance to the dividend history of a company and thus, dividends are irrelevant in calculating the valuation of a company.

Which statement is correct in respect of Modigliani-Miller theory?

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.

Which of the following is not an assumption of the Modigliani-Miller model?

All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The theory stated that the value of the firm is not dependent on the choice of capital structure or financing decisions of the firm.

What is MM Proposition II?

The second proposition of the M&M Theorem states that the company’s cost of equity. The rate of return required is based on the level of risk associated with the investment is directly proportional to the company’s leverage level. An increase in leverage level induces higher default probability to a company.

What is Miller and Modigliani hypothesis What is the underlying logic Under this hypothesis?

What is Modigliani-Miller approach of irrelevance concept of dividend?

Which of the following is not an assumption of the MM theory for irrelevance of dividends?

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.