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Explain the Modigliani and Miller models of capital structure both with and without corporate income taxes. Specifically, explain the relationship between debt leverage and the value of the firm and between debt leverage and the cost of capital.

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The answer describes theoritical propositions of MM approach,practical application of MM approach and MM approach is explained by way of example under with taxes and without taxes by using excel.

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Explain the Modigliani and Miller models of capital structure both with and without corporate income taxes.

Specifically, explain the relationship between debt leverage and the value of the firm and between debt leverage and the cost of capital.
The theoretical propositions of Modigliani Miller is the value of the two firms will be same irrespective of the changes in the capital structure provided the two firms must have same earnings before interest and taxes and the following assumptions should exist to make this proposition valid. The assumptions are:
1. Existence of perfect capital market.
2. Investors have the same expectations about the market value of the firm.
3. Firms within the industry are expected to have same risk.
4. Dividend payout ratio is 100% and ...

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