Modigliani and Miller's Second Article,which Assumed the Existence of Corporate

question 65

True/False

Modigliani and Miller's second article,which assumed the existence of corporate income taxes,led to the conclusion that a firm's value would be maximized,and its cost of capital minimized,if it used (almost)100% debt.However,this model did not take account of bankruptcy costs.The existence of bankruptcy costs leads to the assumption of an optimal capital structure where the debt ratio is less than 100%.

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Definitions:

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and loan payments.

Fixed Operating Expense

Financial obligations that stay the same irrespective of production or sales figures, encompassing rental charges, payroll, and insurance premiums.

High-Low Method

An accounting technique used to estimate the fixed and variable components of a cost based on the highest and lowest activity levels.

Least-Squares Regression

A statistical method used to determine the line of best fit by minimizing the sum of the squares of the vertical distances of the points from the line.