'That personal leverage can replace corporate leverage' is assumed by
M M Model Assumption on Leverage
The Modigliani-Miller (M M) Model, particularly in its foundational propositions concerning capital structure, posits that a firm's value is not affected by its choice of debt and equity financing in perfect capital markets.
Leverage Irrelevance and Personal Substitution
- The core idea behind the M M Model is the irrelevance of corporate leverage to firm value.
- This extends to the assumption that personal leverage can substitute for corporate leverage. Investors can effectively create their own desired level of leverage by borrowing or lending on personal accounts, making the company's financing mix irrelevant to their overall investment strategy and wealth.
- Therefore, the M M Model inherently assumes that the distinction between personal and corporate leverage is immaterial for determining firm value.
Important Questions from Capital structure
Choose the correct code for the following statements being correct or incorrect.
Statement I: Companies generally do not prefer low cost debt financing.
Statement II : Raising debts requires credit rating and payment of interest even if companies suffer losses.
- Which of the following theories of capital structure articulates that a firm borrows up to the point where the tax benefit from extra debt is exactly equal to the cost that comes from the increased probability of financial distress?
- The mean marks of $100$ students were found to be $45$. Later on it was discovered that at the time of computation two are wrongly taken as $23$ and $27$ instead of $32$ and $72$. What is the correct mean?
The optimum capital structure is supported by which combination of the following ?
(i) Traditional theory
(ii) Net income theory
(iii) Pecking order theory
(iv) Net operating income theory
Choose the correct answer from the code given below:
Firms normally finance the working capital needs as per which combination of the following?
(i) Trade credit
(ii) Bank finance
(iii) Commercial papers
(iv) Factoring
Choose the correct answer from the code given below:
