Asked by April Thompson on Jun 10, 2024
Verified
The basic lesson of M&M Theory is that the value of a firm is dependent upon the:
A) Capital structure of the firm.
B) Total cash flows of the firm.
C) Percentage of a firm to which the bondholders have a claim.
D) Tax claim placed on the firm by the government.
E) Size of the stockholders claims on the firm.
M&M Theory
Modigliani and Miller's theory positing that in an ideal market, a company's value is unaffected by how it is financed, whether through debt or equity.
Capital Structure
The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity which funds its overall operations and growth.
Total Cash Flows
The total sum of cash and cash-equivalents moving into and out of a company.
- Gain an understanding of the Modigliani and Miller theories on capital structure within contexts that include and exclude taxation.
Verified Answer
TB
Tsakaia BerkeleyJun 14, 2024
Final Answer :
B
Explanation :
The Modigliani-Miller theorem (M&M Theory) posits that under certain market conditions (especially no taxes, no bankruptcy costs, and symmetric information), the value of a firm is determined by its total cash flows and is not affected by its capital structure.
Learning Objectives
- Gain an understanding of the Modigliani and Miller theories on capital structure within contexts that include and exclude taxation.