If Miller and Modigliani Had Incorporated the Costs of Bankruptcy

question 29

True/False

If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

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Definitions:

Net Working Capital

A financial metric representing the difference between a company's current assets and current liabilities.

Change in Net Working Capital

The difference between the current assets and current liabilities from one period to the next, reflecting changes in liquidity and operational efficiency.

Average Tax Rate

The ratio of the total amount of taxes paid to the total tax base (taxable income or spending), representing the average tax burden.

Capital Gains

The profit earned from the sale of assets like stocks, bonds, or real estate, which exceeds the purchase price.