Question 1 Capital Structure - M&M Theory: The Nobel Prize winning Modigliani & Miller Theory states that a firms capital structure does not matter (See the M&M Handout under Week 6 Modules: Additional Media Resources (supplemental). It is based on three key assumptions: 1. No income taxes 2. Equal borrowing cost-individuals can borrow at the same interest rate as corporations. 3. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs.

A. Are these assumptions reasonable? B. What are the implications if the assumptions do not hold?