Cost of capital using the principles of Modigliani and Miller prepositions

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April 22, 2015 at 1:38 pm #242188
mr n
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Dear sir,
hope you fine.
“Cost of capital using the principles of Modigliani and Miller prepositions or geared and ungeared bias.” can you tell me any questions to practice which has applied that theory or computations or even both
April 22, 2015 at 2:33 pm #242195
John Moffat
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I assume you are referring to the M&M Proposition 2 formula that is given on the formula sheet.
You have never actually needed to use that formula because using the asset beta formula always arrives at the same answer (the formula is derived from M&M) and is usually quicker to use. (The examiner cannot dictate which formula to use)
The only question in recent years where the examiner has used the formula in his answer was Question 1 of the June 2013 exam.
April 22, 2015 at 2:46 pm #242196
mr n
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thxx ok but we still need to know the curves and limitations of the theories right?..will work it out soon 🙂
April 22, 2015 at 2:49 pm #242198
John Moffat
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Yes – certainly you need to know the implications and the limitations of M&M (and of CAPM) 🙂
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