If Miller and Modigliani Had Considered the Cost of Bankruptcy

question 8

True/False

If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

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Definitions:

Political Cost Hypothesis

A theory suggesting that larger firms are more likely to be subject to government scrutiny and regulation, thus incurring additional costs to comply with political expectations.

Political Costs

Wealth transfers imposed on the entity, resulting from political processes.

Accounting Policies

Specific convictions, understructures, modes, prescriptions, and regimens enacted by an entity for the generation and proclamation of financial analyses.

Market Efficiency

The concept that all available information is fully reflected in securities' prices, making it impossible to consistently achieve higher returns without taking on additional risk.