Answer Happy

(a) The Modigliani-Miller theorems is the starting point of the mod- ern theory of Corporate Finance. State their two main propositions (MM1 and MM2) about the effect of capital structure on a corpora- tion's total market value. Explain the assumptions that underly the theorems. 1.5p (b) Prove MM1 by using the technique of "homemade leverage”. Use the following terms: VL = total market value of a leverage company, VU total market value of an unlevered company, EBIT = earnings before interest and taxes, EL = market value of equity of a levered company, Du = market value of debt for a levered company. 2.5p (c) How does the MM-theorems change if one assumes that corporations pay taxes on their earnings after deducting interest cost? 1p =
(a) The Modigliani-Miller theorems is the starting point of the mod- ern theory of Corporate Finance. State their two main propositions (MM1 and MM2) about the effect of capital structure on a corpora- tion's total market value. Explain the assumptions that underly the theorems. 1.5p (b) Prove MM1 by using the technique of "homemade leverage”. Use the following terms: VL = total market value of a leverage company, VU total market value of an unlevered company, EBIT = earnings before interest and taxes, EL = market value of equity of a levered company, Du = market value of debt for a levered company. 2.5p (c) How does the MM-theorems change if one assumes that corporations pay taxes on their earnings after deducting interest cost? 1p =