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:

Hypothesis

An assumption that is tested through research and experimentation.

Original Hypothesis

The initial theory or assumption that is made at the beginning of a research or experimental process, proposing a potential outcome.

Adapt

The ability to change or adjust oneself or one's approach to meet different conditions or environments.

Terminate

To bring an end to something; in business, it can refer to the conclusion of a contract, the end of an employment relationship, or the cessation of operations.