If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

Question

Quizplus · Accepted Answer

Miller and Modigliani's model assumes that there are no costs of bankruptcy, but in reality, there are costs associated with bankruptcy such as legal fees and loss of reputation, which would make 100% debt financing less optimal. Taking into account these costs would have led to a different conclusion than the original model.

If Miller and Modigliani Had Incorporated the Costs of Bankruptcy