M&M Proposition 1: The Modigliani and Miller theory suggests that the value of the firms assets is
Question:
M&M Proposition 1: The Modigliani and Miller theory suggests that the value of the firm’s assets is equal to the value of the claims on those assets and is not dependent on how the asset claims are divided. The common analogy to the theorem is that the total amount of pie available to be eaten (the firm) does not depend on the size of each slice of pie. If we continue with that analogy, then what if we cut up the pie with a very dull knife such that the total amount of pie available to be eaten is less after it is cut than before it was cut. Which of the three Modigliani and Miller assumptions, if relaxed, is analogous to the dull knife? Hint: Think about the process by which investors could undo the effects of a firm’s capital structure decisions.
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781119795438
5th Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates