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Main contents : Capital Structure theory : Modigiani milling machine theory (M & M ) Assumptions of M-M: 1.The companies do not represent apprise 2.Do not need to pay commission/fees to investment monetary resource bankers /brokers on raise of capital 3.Do not cook to pay lawyers when partnership is declare bankrupt. 4.Perfect market 5. internal information of company is share by either 6. some(prenominal) firms and investors can borrow at the real(prenominal) interest measure. ·Modigliani- miller (M-M) proposition 1: The value of a firm is the same regardless of whether it finances itself with debt or legality. The burthen average monetary value of capital is constant. Under MM assumptions ,firm identical in all aspects apart from capital structure should nonplus same value. note value is determined by stream of operating cash flows and the percentage point of concern risk attaching to these , regardless of how cash flows are divided turn up between different classes of investor. Under MM and excluding revenue enhancementes ,WACC rod cell the same- as gearing increases the impact of increasing cost of integrity ( Ke )is exactly offset by the lower cost of debt ( kd ) as shown in diagram .

Note from the diagram that a actually high level of gearing MM believe that ke would renounce as beauteousness risk taker come into the market renewal the existing shareholders who impart sale their part of shares due to detection of increase of risk factor . Further extension of d ebt impart increase cost of debt as lenders! will increase mark of interest on debt due to increase in cake of debt . This implies in calculation : ·Vg = Vug ·Keg= Keu + D/E ( Keu - kd ) ·WACC g = WACC ug Vg Value of geared entity Vug Value of un-geared entity Keg = Cost of equity geared Keu = Cost of equity un-geared Kd= Cost of debt MM WITH TAXES : In 1963 MM theory accepted that corporate valueation could become an impact as interest expense provide tax advantage . Therefore it was drawn that interest expense...If you want to acquire a full essay, order it on our website: BestEssayCheap.com

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