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The Nobel Prize winning Modigliani & Miller Theory states that a firms capital structure does not matter. It is based on three key assumptions: No
The Nobel Prize winning Modigliani & Miller Theory states that a firms capital structure does not matter. It is based on three key assumptions:
No income taxes
Equal borrowing cost- individuals can borrow at the same interest rate as corporations.
Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs.
Are these assumptions reasonable?
What are the implications if the assumptions do not hold?
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