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:

Presented Information

Information that is provided or made available to an individual or group for consideration or analysis.

Avoid Losses

A principle in behavioral finance and economics indicating people's tendency to prefer avoiding losses to acquiring equivalent gains, known as loss aversion.

Kahneman And Tversky

Psychologists noted for their work on the psychology of judgment and decision-making, as well as behavioral economics.

Risks

Potential events or actions that may cause loss or hinder achievement of objectives.