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Essay / Research Paper Abstract
This 10 page paper is written in two parts. The first part looks at the Modigliani–Miller theorem and shows how it works with a mathematical example. The second part of the paper considers whether the model has been over theorised in its’ development and subsequent examinations. The bibliography cites 6 sources.
Page Count:
10 pages (~225 words per page)
File: TS14_TEmodigmiller.rtf
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Unformatted sample text from the term paper:
One of the most controversial has been Modigliani and Millers Equity Arbitrage theorem. This is a theory that forms the basis of capital structure theories, and comes on two
versions, with and without taxes. The original theory is without taxes so we will look at this version. The basic theory is that where there are not costs of taxes,
bankruptcy and in an environment where there is no asymmetric information and the market is efficient the value of a company will not reflect the capital structure or the companys
dividend policy. In theory where there are two companies (U) an unleveraged company and (L) a leveraged company, both will have the same value where they are the same expect
for the capital structure. This can be examined by looking at the two propositions (Modigliani and Miller, 1958). The first proposition states VU = VL , with this
VU is the value of the company that is not leveraged (unleveraged), and VL is the value of the leveraged company. So buying all of company Us equity is
the same as buying Ls equity and debt (Modigliani and Miller, 1958). For example, if there is a potential investor who is considering making a investment and buying
either company U or company L, he could buy company L and then borrow the same amount of money that company L is borrowing. The argument is that the either
of these investment would result in the same return. This means that the value of L will need to be the same as the value of U less the money
that was borrowed that is Ls level of debt. Inherent in this is the assumption that the investor will be able to borrow capital at the same rate that the
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