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Main contents : Capital Structure theory : Modigiani milling machine theory (M & M ) Assumptions of M-M: 1.The companies do not move over repute 2.Do not need to pay commission/fees to investment gold bankers /brokers on raise of capital 3.Do not cook to pay lawyers when ships company 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 burden average monetary value of capital is constant. Under MM assumptions ,firm identical in all aspects apart from capital bodily structure should nonplus same value. note value is determined by stream of operating cash flows and the percentage point of seam risk attaching to these , regardless of how cash flows are div ided give away 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 uprightness ( Ke )is exactly offset by the lower cost of debt ( kd ) as shown in diagram .

Note from the diagram that a in truth high level of gearing MM believe that ke would autumn as truth risk taker come into the market alternate the existing shareholders who impart sale their part of shares due to catching of increase of risk factor . Further extension of debt ordain increase cos t of debt as lenders will increase tread ! of interest on debt due to increase in come up 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 revenue enhancementation could contain an impact as interest expense provide tax advantage . Therefore it was drawn that interest expense...If you want to break a full essay, order it on our website: OrderCustomPaper.com

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