Asked by Jaylin Johnson on May 30, 2024
Verified
The MM model employs the concept of arbitrage to develop its theory.
MM Model
Refers to the Modigliani-Miller theorem, a foundational concept in corporate finance that states that under certain market conditions, the value of a firm is unaffected by how it is financed.
Arbitrage
The simultaneous buying and selling of the same commodity or security in two different markets at different prices, thus pocketing a risk-free return.
- Comprehend the significance and consequences of both corporate and individual taxation on decisions related to the capital structure, as elucidated by the MM and Miller frameworks.
- Identify the presumptions and constraints of theoretical frameworks, including the MM and Miller models, particularly concerning taxes and insolvency expenses.
Verified Answer
BC
Brenda Cabrera GodoyJun 06, 2024
Final Answer :
True
Explanation :
The MM (Modigliani-Miller) model is based on the concept of arbitrage, which refers to the process of taking advantage of price differences to make profits without incurring any risk. In their model, Modigliani and Miller showed that under certain assumptions, the value of a firm is independent of its capital structure, meaning that the cost of capital and the value of the firm remain constant regardless of how the firm is financed. This theory is also known as the capital structure irrelevance principle.
Learning Objectives
- Comprehend the significance and consequences of both corporate and individual taxation on decisions related to the capital structure, as elucidated by the MM and Miller frameworks.
- Identify the presumptions and constraints of theoretical frameworks, including the MM and Miller models, particularly concerning taxes and insolvency expenses.