Purchase Solution

Modigliani-Miller model

Not what you're looking for?

Ask Custom Question

Question 1:

Assume there are two companies operating in the same industry. The two companies are almost identical. The only difference is their capital structure. Company UU has only equity while company LL has 30% of debt and 70% of equity.

Further assume that both companies have the same expected net operating income of $1,000. We make a further assumption that this stream of income will last forever. The required rate of return for both companies is 5%.

a) According to the Modigliani-Miller model, what is the value of company UU and company LL? Explain.
b) Assume that the capital structure of company UU changes. The new capital structure is such that company UU has 20% of debt and 80% of equity. Does your result in a) change? Explain.
c) Under which circumstances, in your opinion, might the Modigliani-Miller model work?
d) Assume you have just been appointed financial manager of company UU. You need to decide what the optimal capital structure is.
What would you do?

Attachments
Purchase this Solution
Solution Summary

Modigliani-Miller model is utilized.

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Modigliani and Miller model-Explantion by Example in Excel

    The annswer contains the theoritical propositions of Modigliani and Miller model both under with taxes and without taxes, practical application of MM approach and MM approach is explained by example in Excel under with and without taxes.

  • Miller and Modigliani Model

    154676 Miller and Modigliani Model According to the Miller and Modigliani model dividened policy is irrelevant. However, there are numerous factors in the real world that violate the MM assumptions.

  • Modigliani Miller approach,creation of value

    Modigliani Miller proposition is that value of the firm cannot be increased by the issue of debt.

  • Multiple Choice - Modigliani and Miller

    Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect. b.

  • Modigliani and Miller model-Example by Excel

    Modigliani Miller proposition is that value of the firm cannot be increased by the issue of debt.

  • David Lyons, CEO of Lyons Solar Technologies, is concerned

    (1) What is the gain from leverage according to the Miller model? (2) How does this gain compare with the gain in the MM model with corporate taxes?

  • Modigliani-miller approach

    The answer contains Modigliani-Miller approach,its assumption and also explains by illustration how the home made leverage is the perfect substitute for corporate borrowing.

  • Modigliani-Miller Proof

    375461 Modigliani-Miller Proof Consider a Modigliani-Miller world with no taxes. In this world, consider a firm which is expected to generate constant cash flows in perpetuity. For this firm VU = VL = D+S and ks = k0 + (D/S)(k0 - kd).

  • Dividend Theory

    This is consistent with the bird-in-the-hand theory, and Modigliani and Miller used these findings to support their position on dividend theory. - d.

View More Related Solutions