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M-M Hypothesis for capital structure is based on which code of the following assumptions?
(a) Capital markets are perfect.
(b) Firms belong to equal risk class.
(c) There is 100% dividend payout ratio.
(d) There are nominal corporate taxes.
(b) Firms belong to equal risk class.
(c) There is 100% dividend payout ratio.
(d) There are nominal corporate taxes.
Select the correct code.
- a)(a) and (b) only
- b)(a), (b) and (c) only
- c)(b), (c) and (d) only
- d)(a), (b) and (d) only
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
M-M Hypothesis for capital structure is based on which code of the fol...
Modigliani Millar approach, popularly known as MM approach is similar to the net operating income approach. The MM approach favours the net operating income approach and agrees with the fact that the cost of capital is independent of the degree of leverage and at any mix of debt-equity proportions.
Assumptions of MM approach:
1. Capital markets are perfect.
2. All investors have the same expectation of the company's net operating income for the purpose of evaluating the value of the firm.
3. Within similar operating environments, the business risk is equal among all firms.
4. There is 100% dividend payout ratio.
Assumptions of MM approach:
1. Capital markets are perfect.
2. All investors have the same expectation of the company's net operating income for the purpose of evaluating the value of the firm.
3. Within similar operating environments, the business risk is equal among all firms.
4. There is 100% dividend payout ratio.
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M-M Hypothesis for capital structure is based on which code of the fol...
The M-M (Modigliani-Miller) Hypothesis for capital structure is based on the following assumptions:
(a) Capital markets are perfect.
(b) Firms belong to the equal risk class.
(c) There is a 100% dividend payout ratio.
(d) There are nominal corporate taxes.
Let's discuss each assumption in detail:
(a) Capital markets are perfect:
- This assumption implies that there are no transaction costs, no taxes, and no asymmetrical information in the capital markets.
- Perfect capital markets mean that investors have access to all relevant information and can freely buy and sell securities without any costs or restrictions.
- In such perfect markets, the capital structure of a firm becomes irrelevant as the cost of capital is the same regardless of the mix of debt and equity financing.
(b) Firms belong to the equal risk class:
- This assumption suggests that all firms in the market are similar in terms of business risk.
- It means that the riskiness of the firm's assets is the same regardless of its capital structure.
- In other words, the market value of the firm is determined by the cash flows generated by its assets and is not affected by the way it is financed.
(c) There is a 100% dividend payout ratio:
- This assumption implies that firms distribute all their earnings as dividends to their shareholders.
- Under this assumption, retained earnings are not available for investment in new projects, and hence, the firm's investment decisions are independent of its financing decisions.
- As a result, the capital structure becomes irrelevant, and the value of the firm is determined solely by the cash flows generated by its assets.
(d) There are nominal corporate taxes:
- This assumption suggests that corporate taxes exist but are negligible or have no impact on the firm's financing decisions.
- In such a scenario, the tax advantages of debt financing are not significant, and the capital structure becomes irrelevant.
In summary, the M-M Hypothesis for capital structure is based on the assumptions of perfect capital markets, firms belonging to the equal risk class, a 100% dividend payout ratio, and nominal corporate taxes. These assumptions imply that the capital structure of a firm does not affect its value, and the cost of capital is independent of the mix of debt and equity financing.
(a) Capital markets are perfect.
(b) Firms belong to the equal risk class.
(c) There is a 100% dividend payout ratio.
(d) There are nominal corporate taxes.
Let's discuss each assumption in detail:
(a) Capital markets are perfect:
- This assumption implies that there are no transaction costs, no taxes, and no asymmetrical information in the capital markets.
- Perfect capital markets mean that investors have access to all relevant information and can freely buy and sell securities without any costs or restrictions.
- In such perfect markets, the capital structure of a firm becomes irrelevant as the cost of capital is the same regardless of the mix of debt and equity financing.
(b) Firms belong to the equal risk class:
- This assumption suggests that all firms in the market are similar in terms of business risk.
- It means that the riskiness of the firm's assets is the same regardless of its capital structure.
- In other words, the market value of the firm is determined by the cash flows generated by its assets and is not affected by the way it is financed.
(c) There is a 100% dividend payout ratio:
- This assumption implies that firms distribute all their earnings as dividends to their shareholders.
- Under this assumption, retained earnings are not available for investment in new projects, and hence, the firm's investment decisions are independent of its financing decisions.
- As a result, the capital structure becomes irrelevant, and the value of the firm is determined solely by the cash flows generated by its assets.
(d) There are nominal corporate taxes:
- This assumption suggests that corporate taxes exist but are negligible or have no impact on the firm's financing decisions.
- In such a scenario, the tax advantages of debt financing are not significant, and the capital structure becomes irrelevant.
In summary, the M-M Hypothesis for capital structure is based on the assumptions of perfect capital markets, firms belonging to the equal risk class, a 100% dividend payout ratio, and nominal corporate taxes. These assumptions imply that the capital structure of a firm does not affect its value, and the cost of capital is independent of the mix of debt and equity financing.
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M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer?
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M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer? for UGC NET 2025 is part of UGC NET preparation. The Question and answers have been prepared according to the UGC NET exam syllabus. Information about M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer? covers all topics & solutions for UGC NET 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer?.
M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer? for UGC NET 2025 is part of UGC NET preparation. The Question and answers have been prepared according to the UGC NET exam syllabus. Information about M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer? covers all topics & solutions for UGC NET 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer?.
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ample number of questions to practice M-M Hypothesis for capital structure is based on which code of the following assumptions?(a) Capital markets are perfect.(b) Firms belong to equal risk class.(c) There is 100% dividend payout ratio.(d) There are nominal corporate taxes.Select the correct code.a)(a) and (b) onlyb)(a), (b) and (c) onlyc)(b), (c) and (d) onlyd)(a), (b) and (d) onlyCorrect answer is option 'B'. Can you explain this answer? tests, examples and also practice UGC NET tests.
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