Modigliani and Miller (MM),in their second article,took account of taxes,bankruptcy,and other factors that were assumed away in their original article.Once they took account of all these assumptions,they concluded that every firm has a unique optimal capital structure.Moreover,a manager can use the second MM model to determine his or her firm's optimal debt ratio.

Question

Quizplus · Accepted Answer

The statement is incorrect. In their second article, Modigliani and Miller concluded that under certain assumptions, a firm's capital structure is irrelevant and that there is no optimal debt ratio. They argued that investors can achieve their desired level of leverage through personal borrowing and lending, and that the value of a firm is determined by its underlying cash flows and not by its capital structure.

Modigliani and Miller (MM),in Their Second Article,took Account of Taxes,bankruptcy,and