The Modigliani and Miller Hypothesis Does NOT Work in the "Real

question 83

Multiple Choice

The Modigliani and Miller hypothesis does NOT work in the "real world" because

• A)interest expense is tax deductible,providing an advantage to debt financing.
• B)higher levels of debt increase the likelihood of bankruptcy,and bankruptcy has real costs for any corporation.
• C)both A and B.
• D)dividend payments are fixed and tax deductible for the corporation.

---

Definitions:

Cost of Capital

The compulsory return rate businesses need on investment plans to sustain their market position and attract monetary contributions.

NPV

Net Present Value, a calculation used to determine the present value of an investment's expected future cash flows compared to its initial cost.

Internal Rate

Refers to the internal rate of return (IRR), a financial metric used to estimate the profitability of potential investments.

Cash Flows

The entire sum of funds moving into and exiting a business, particularly impacting its liquidity and comprehensive financial well-being.