The Modigliani and Miller (MM)articles Implicitly Assumed That Bankruptcy Did

question 73

True/False

The Modigliani and Miller (MM)articles implicitly assumed that bankruptcy did not exist.That led to the development of the "trade-off" model,where the firm's value first rises with the use of debt due to the tax shelter of debt,but later falls as more debt is added because the potential costs of bankruptcy begin to more than offset the tax shelter benefits.Under the trade-off theory,an optimal capital structure exists.

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Definitions:

Price-inelastic

Price-inelastic describes a situation where the demand for a good or service is relatively unaffected by changes in its price, indicating that consumers continue to purchase it even if the price increases.

University of Michigan

A public research university located in Ann Arbor, Michigan, known for its rigorous academic programs and significant contributions to research.

Lowest Price Elasticity

Refers to the scenario where the demand for a good or service is least responsive to changes in price.

Estimating Price Elasticity

The process of determining how sensitive the quantity demanded of a good is to a change in its price.