Posted: November 29th, 2017

Modigliani and Miller: A Challenge to Capital Budgeting Strategies, Business & Finance Assignment Assignment: I need help writing a research paper.

Question description

ORIGINAL
QUESTION:
Modigliani and Miller: A Challenge to Capital
Budgeting Strategies
Financing corporate purchases and overall capital
budgeting usually requires the finance manager to assess tax rates, dividend
payout policy, weighting of capital sources, and more. However, the Modigliani
and Miller propositions state that, in most situations, it does not matter if
the firm’s capital is raised by issuing stock or selling debt. As a student you
might assume studies of capital budgeting strategies will no longer be reviewed
in coursework. Before coming to that conclusion please discuss the principles
presented by Modigliani and Miller and explain your agreement or disagreement.

STUDENT
1 RESPONSE:
The Modigliani-Miller Theorem (M&M) is a financial
theory that believes that the market value of a company is determined by their
earning power and the risk of their underlying assets and does not have
anything to do with how an organization chooses to finance its investments
whether it is debt or equity (Ozyasar, 2015 – Research Paper Writing Help Service). Some of the principles of
Modigliani-Miller theorem are no matter how a firm is financed profitability is
unaffected by the financing decisions. In order for this theorem to hold true
certain things have to also be true like no transaction cost when a firm is
issuing stocks or bonds, companies and or investor can borrow money at the same
cost and the company will not squander any extra cash they gain from doing
business.
I disagree with the Modigliani-Miller theorem because
all of the scenarios presented are never true in real life for one whenever a
company issues stocks or bonds there will be transaction cost associated with
them such as fees and commissions. There is also the idea that borrowing cost
have to be equal for individuals and firms which does not happen in real life
because a firm will usually have a better credit rating than most individuals
which will allow them to borrow money at much better rates than most individual
would ever be able to get. Another part of the theorem that usually never
happens is that the business must not squander excess cash which would also be
unlikely that any one individual has to be taking cash and spending it
personally but usually firms will invest excess cash and sometimes these
investments will not work out meaning risk have to be taken.
After going over the theorem and applying it to real
life it just wouldn’t happen because all of the things that have to take place
for companies not to be affected by how they finance their investments will
never take place in real life, it is more likely that the exact opposite will
happen which makes me totally disagree with Modigliani-Miller.
Paul Boling
References:
Ozyasar, H. (2015 – Research Paper Writing Help Service). Assumptions of the
Modigliani-Miller Theorem. Retrieved 05/18/2016: 2024 – Do my homework – Help write my assignment online from
http://smallbusiness.chron.com/assumptions-modiglianimiller-theorem-55674.html
STUDENT
2 RESPONSE:
Prof and Class,
Modigliani and Miller: A
Challenge to Capital Budgeting Strategies
Financing corporate
purchases and overall capital budgeting usually requires the finance manager to
assess tax rates, dividend payout policy, weighting of capital sources, and
more. However, the Modigliani and Miller propositions state that, in most situations,
it does not matter if the firm’s capital is raised by issuing stock or selling
debt. As a student you might assume studies of capital budgeting strategies
will no longer be reviewed in coursework. Before coming to that conclusion
please discuss the principles presented by Modigliani and Miller and explain
your agreement or disagreement.

Modigliani
and Miller,
two professors in the 1950s, studied capital-structure theory intensely. From
their analysis, they developed the capital-structure irrelevance proposition.
Essentially, they hypothesized that in perfect markets, it does not matter what
capital structure a company uses to finance its operations. They theorized that
the market value of a firm is determined by its earning power and by the risk
of its underlying assets, and that its value is independent of the way it
chooses to finance its investments or distribute dividends

The basic M&M proposition is based on the following key assumptions:
No taxes No transaction costs No bankruptcy costs Equivalence in borrowing costs for both
companies and investors Symmetry of market information, meaning
companies and investors have the same information No effect of debt on a company’s earnings
before interest and taxes
Of course, in the real
world, there are taxes, transaction costs, bankruptcy costs, differences in
borrowing costs, information asymmetries and effects of debt on earnings. To
understand how the M&M proposition works after factoring in corporate
taxes, however, we must first understand the basics of M&M propositions I
and II without taxes.

I agree that there is risk in investing and no matter how big or how small of
the amount invested, that there will be underlying costs including taxes,
transaction costs, and any and/or bankruptcy costs that may occur in case the
business goes under. This is why there must be a professional investment firm
involved and legal representation and paperwork drawn up in the case of any
unforseen losses.

Read more: Modigliani
And Miller’s Capital Structure Theories – Complete Guide To Corporate Finance |
Investopedia https://essays.homeworkacetutors.com/write-my-essay/investopedia.com/walkthrough/corporate-finance/5/capital-structure/modigliani-miller.aspx#ixzz493fldR00

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