# What is MM proposition I and II with no taxes?

## What is MM proposition I and II with no taxes?

MM Proposition I (without taxes): The market value of the company is not affected by the capital structure of the company. MM Proposition II (without taxes): The cost of equity is a linear function of the company’s debt/equity ratio.

### What is MM’s proposition 1 with and without corporate tax?

The first proposition essentially claims that the company’s capital structure does not impact its value. Since the value of a company is calculated as the present value of future cash flows, the capital structure cannot affect it. Also, in perfectly efficient markets, companies do not pay any taxes.

**What did Modigliani and Miller conclude when taxes are included in their model?**

The Modigliani and Miller Approach assumes that there are no taxes, but in the real world, this is far from the truth. Most countries, if not all, tax companies. This theory recognizes the tax benefits accrued by interest payments. The interest paid on borrowed funds is tax-deductible.

**What does MM proposition I with corporate taxes state?**

MM Proposition I with corporate taxes states that: I) Capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield II) By raising the debt-to-equity ratio, the firm can lower its taxes and thereby incr | Study.com.

## What does MM proposition II state select all that apply?

What is MM’s Proposition 2? The expected rate of return on the common stock of a levered firm increases in proportion to the debt-equity ratio (D/E), expressed in market values; the rate of increase depends on the spread between rA and rD.

### What is MM model?

Key Takeaways. The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value. Market value is determined by the present value of future earnings, the theorem states. The theorem has been highly influential since it was introduced in the 1950s.

**Why does the MM theory with corporate taxes lead to 100% debt?**

Why does the MM theory with corporate taxes lead to 100% debt? says that the value of a levered firm is equal to the value of an unlevered firm plus the value of any side effects, which include the tax shield and the expected costs due to financial distress.

**Why is MM theory important?**

The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value. Market value is determined by the present value of future earnings, the theorem states. The theorem has been highly influential since it was introduced in the 1950s.

## Which of the following assumptions is necessary for MM proposition I to hold?

Which of the following assumptions is necessary for MM Proposition I to hold? Individuals can borrow on their own at an interest rate equal to that of the firm.

### Which is not an exemption under mm hypothesis?

MM model states that a company is able to issue additional equity shares. This model is not valid when there is under-pricing or sale of shares at a price which is lower than the current market price. This means that the firm will have to sell more shares if it does not want to give a dividend.

**What are the exemption under mm hypothesis?**

**What is assumption of MM approach?**

The Key Assumptions of M&M Theorem The investors in a perfect market are allowed to borrow at the same cost at which they lend, and they invest rationally. It is also implied that there are no transaction costs that have to be made in the process.

## What is the major assumption of pure MM theory?

The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the enterprise value of a firm is unaffected by how that firm is financed.

### What are the MM Proposition I and II with corporate taxes?

Proposition I states that the market value of any firm is independent of the amount of debt or equity in capital structure. Proposition II states that the cost of equity is directly related and incremental to the percentage of debt in capital structure.

**What does MM Proposition II state select all that apply?**

**What is M and M proposition?**

The M and M proposition says that if there were no costs of separation (and, of course, no government dairy-support programs), the cream plus the skim milk would bring the same price as the whole milk.”

## What is MM’s proposition 2 quizlet?

what is MM’s proposition 2? The expected rate of return on the common stock of a levered firm increases in proportion to the debt-equity ratio (D/E), expressed in market values; the rate of increase depends on the spread between rA and rD.

### Which of the following proposition is made by Modigliani and Miller?

Question: Modigliani and Miller’s Proposition I states that: (a) The market value of any firm is independent of its capital structure.

**Which is the correct definition of Modigliani Miller MM Proposition I no tax )?**

The Modigliani-Miller Proposition I without taxes states that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

**What is levered value?**

The value of a levered firm is the sum of the market values of the firm’s debt and equity.

## What is MM’s Proposition 2 quizlet?

### Which of the following are equivalent under M&M proposition I?

Maximizing firm value and maximizing firm profit Maximizing firm value and minimizing the cost of capital Minimizing firm’s cost of capital and minimizing firm’s debt burden Maximizing profit and minimizing taxes.

**What is levered vs unlevered?**

Levered cash flow is the amount of cash a business has after it has met its financial obligations. Unlevered free cash flow is the money the business has before paying its financial obligations. Operating expenses and interest payments are examples of financial obligations that are paid from levered free cash flow.

**What are the assumption of MM theory?**

MM model assumes that there are no floatation costs and no time gaps are required in raising new equity capital. In the practical world, floatation costs must be incurred and legal formalities must be completed and then issues can be floated in the market.

## What is the difference between FCF and UFCF?

Key Takeaways. Unlevered free cash flow (UFCF) is the amount of available cash a firm has before accounting for its financial obligations. Free cash flow (FCF), on the other hand, is the money a company has left over after paying its operating expenses and capital expenditures.

### What is a good p FCF ratio?

If you’re looking for a company with a good price to free cash flow, you want to look for anything under 15. A price to free to free cash flow under 15 means the company is trading for a market capitalization that’s less than 15 times the free cash flow it generated over the past 12 months.

**Is FCFF or FCFE higher?**

Assuming a company has some debt, its FCFF will be higher than FCFE by the after-tax cost of debt amount.

**How do I go from FCF to UFCF?**

How do you calculate unlevered free cash flow from net income? Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure. To arrive at unlevered cash flow, add back interest payments or cash flows from financing.

## What is FCF to EV?

The Enterprise Value to Free Cash Flow Ratio, or EV / FCF Ratio, contrasts a company’s Enterprise Value relative to its Free Cash Flow. It is defined as Enterprise Value divided by Free Cash Flow.

### What does the Modigliani Miller theorem state?

1 The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value. 2 Market value is determined by the present value of future earnings, the theorem states. 3 The theorem has been highly influential since it was introduced in the 1950s.

**What is Proposition 1 of the M&M II theorem?**

Proposition 1 (M&M II): Where: t c = Tax rate; D = Debt The first proposition states that tax shields that result from the tax-deductible interest payments make the value of a levered company higher than the value of an unlevered company. The main rationale behind the theorem is that tax-deductible interest payments positively affect a company

**How does the Modigliani-Miller theorem work in a world without taxes?**

The key Modigliani-Miller theorem was developed in a world without taxes. However, if we move to a world where there are taxes, when the interest on debt is tax-deductible, and ignoring other frictions, the value of the company increases in proportion to the amount of debt used.