- This topic has 2 replies, 2 voices, and was last updated 6 years ago by
.
- Posts
Hello ,
I just wanted to repeat a question asked before . Please refer the question below.M&M 1963 theory of capital structure assumes that :
1/ The Cost of equity remains constant regardless of the gearing level
2/ Financial distress does not carry any cost
3/ Companies can borrow at Zero Cost
4/A Company is liable to tax but not its shareholdersThe above question however in the Kaplan study text mentions the answer as Answer “2”,
whereas I recall in your video (I believe its “Capital Structure -theories” ) as answer “4” . I just need to Clarify , which is the correct one?
Thank you for your concern.Hi,
Sorry for the delayed response. M&M’s 1963 theory includes company tax, and ignores personal tax. Based on this I’d say that the question in the class notes is correct.
Financial distress does carry costs, as we include bankruptcy at high levels of gearing.
Thanks
- The topic ‘Example question – M & M With Tax theory’ is closed to new replies.