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ch16Multinational Capital Structure and Cost of Capital(跨国公司,Kirt C. Butler)PPT
The MM capital structure model demonstrates that market imperfections drive the firm’s optimal capital structure. Students that have been exposed to the MM capital structure model in another class will recall the MM propositions: MM Proposition I: VL = VU + TCB MM Proposition II:iS = i0 + (i0-iF)(B/S)(1-TC) where VL and VU are the market values of the levered and the unlevered firm, TC is the corporate income tax rate, B and S are the market values of debt (bonds) and equity (stock), and iS, i0 and iF are the required returns on the leveled equity, the unlevered equity, and the riskfree asset, respectively. The basic intuition of these propositions is driven by their perfect market assumptions. The particular form is driven by MM’s assumption of perpetual cash flows. In the real world, there is no exact solution to the capital structure decision. The financial manager needs to get the capital structure choice approximately right. The perfect market assumptions were developed and applied in: Franco Modigliani and Merton Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review 48, June 1958, pages 261-297. Modigliani and Miller, “Corporate Income Taxes and the Cost of Capital: A Correction,” American Economic Review 53, June 1963. The perfect market assumptions ensure that all investors have equal access to costless information in frictionless markets. In order to simplify their proof, MM also assumed: The existence of homogeneous business risk classes, so that there exist perfect substitutes for every asset Homogeneous investor expectations, so that everyone has the same expectations All cash flows are perpetual Modigliani and Miller each won the Nobel Prize in Economics. Modigliani received the award in 1985 for contributions to finance, economics, and management science. Miller received the award in 1990, primarily for contributions to finance. MM’s irrelevance proposition says that the value of an a
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