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M&M ignoring tax.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › M&M ignoring tax.

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • January 24, 2017 at 6:32 am #369148
    aamir2111
    Participant
    • Topics: 123
    • Replies: 85
    • ☆☆☆

    Dear Mike,
    As per notes, page 98, “….. A further implication of M&M’s finding is that the total market vakue of the Company ( equity plus debt) will be unaffected by changes in gearing…… which ever way the company is finance the total available for distribution will be unchanged….)

    1) isn’t the total market value of a Company equal to the Net Asset value, which is equal to Total assets less liablities. Therefore, strictly the Market value of the Company must be equal Equity & not Equity plus debt?

    2) “… the total available for distribution will be unchanged” What total is it refereing to? The total Earnings?

    January 24, 2017 at 8:05 am #369187
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Mike does not teach F9 for us, and never has done!

    The total market value of a company is equal to the market value of the long term finance – equity plus debt. In the absence of tax, it does not matter how a company raises its finance – it won’t change the value of the company overall.

    The total available for distribution is the total available to distribute to the long term finance – shareholders and long-term debt lenders.

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