Question
Hi, I'm not sure how to approach this question Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in
Hi, I'm not sure how to approach this question
Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in determining the value of a firm. Outline the arguments they used to reach their positions, including the assumptions underlying those arguments. discuss why the M&M hypotheses might not hold in practice.
Solution: Outline assumptions of perfect capital market: 1. No costs of trading shares 2. No costs of issuing shares 3. All market participants have the same information 4. No personal or corporate taxes 5. Individuals borrow and lend at the same rate as the company. Students need to be able to reproduce proofs of both dividend and capital structure irrelevance arguments.Students then need to illustrate at least one example each of how relaxing the assumptions above might affect make dividend AND capital structure policy relevant
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