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Modigliani and Miller proposition that a firms value is not affected by capital structure depends among others on the assumption that business risk does not
Modigliani and Miller proposition that a firms value is not affected by capital structure depends among others on the assumption that business risk does not depend on leverage. However, in real world companies, a firms leverage may substantially affect managers incentives when selecting real investment projects. Based on this mechanism, provide two reasons why a firms business risk may increase with leverage.
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