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Main contents : Capital Structure theory : Modigiani milling machine theory (M & M ) Assumptions of M-M: 1.The companies do not expect treasure 2.Do not need to pay commission/fees to investment currency bankers /brokers on raise of capital 3.Do not cook to pay lawyers when high society 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 weighted average monetary value of capital is constant. Under MM assumptions ,firm identical in all aspects apart from capital grammatical construction should nonplus same value. note value is determined by stream of operating cash flows and the percentage point of origin risk attaching to these , regardless of how cash flows are divided place between different classes of investor. Under MM and excluding revenue enhancementes ,WACC dismount the same- as gearing increases the impact of increasing cost of impartiality ( Ke )is exactly offset by the lower cost of debt ( kd ) as shown in diagram . Note from the diagram that a rattling high level of gearing MM believe that ke would present as righteousness risk taker come into the market alternate the existing shareholders who impart sale their part of shares due to sleuthing of increase of risk factor . Further extension of debt exit increase cost of debt as lenders will increase station of interest on debt due to increase in surface 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 assessation could assimilate an impact as interest expense provide tax advantage . Therefore it was drawn that interest expense...If you want to develop a full essay, order it on our website: BestEssayCheap.com

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