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MM model.

  • 11-12-2012 9:50pm
    #1
    TEMPLAR KNIGHT
    Closed Accounts Posts: 961 ✭✭✭


    I thought it woulod be best posting this here! I have my advanced corporate finance exam this week and the same two essays come up every year im looking for any recommended online readings that may help me with them

    • Modigliani and Miller (MM) (1961) show that, in perfect capital markets, the dividend policy of a firm can be seen to be irrelevant. However, in contrast the bulk of the evidence tends to suggest that either dividend policy is important, or is seen to be important by firms.

    Discuss this statement, paying particular attention to how the introduction of capital market imperfections may lead to opposing views as to the relevance of dividend policy. Overall, what factors emerge as being important in determining the importance of dividend policy?






    • Modigliani and Miller (MM) (1958) outline a model in which a firm’s capital structure has no impact on the market value of the firm. However the introduction of corporate taxes and financial distress costs has the effect of substantially altering the conclusion of their original model.

    Discuss how the introduction of corporate taxes and financial distress costs change the original MM conclusions. Outline what the revised model tells us about a firm’s optimal capital structure.





    Can anybody recommend any good readings online to help me answer these?


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