The Modigliani and Miller hypothesis does NOT work in the "real world" because
A)interest expense is tax deductible,providing an advantage to debt financing.
B)higher levels of debt increase the likelihood of bankruptcy,and bankruptcy has real costs for any corporation.
C)both A and B.
D)dividend payments are fixed and tax deductible for the corporation.

Question

Quizplus · Accepted Answer

The Modigliani and Miller hypothesis assumes no taxes and no bankruptcy costs, making their conclusions unrealistic in the real world where these factors exist. Interest expense is tax deductible, giving an advantage to debt financing (A), but higher levels of debt also increase the likelihood of bankruptcy, which has real costs for corporations (B). Therefore, the Modigliani and Miller hypothesis does not hold in the real world, where both factors are relevant.  Dividend payments (D) are not directly related to the hypothesis, as the focus is on capital structure and financing decisions.

The Modigliani and Miller Hypothesis Does NOT Work in the "Real