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Miller & Modigliani's Theory in Financial Management saying cost of capital is independent of firm's capital structure !!

Created by : Sharadchandra Joshi, Post Graduate Teacher for Higher Secondary, P P Savani Cambridge International School  | 11 25 2010 17:45:32 +0000
Keywords : miller & modigliani's theory in financial management saying cost of capital is independent of firm's capital structure !!
Activity:  409 views;  last activity : 11 27 2010 10:33:54 +0000
 
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Cost of Capital is dependent on firm's capital structure Vs Cost of capital is independent of firm's capital structure
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It is dependent. The firm can lower its cost of capital and increase market value per share by the judicious use of leverage. 
By Latha Baskar, Accounts Manager, L & T Infotech  11 26 2010 09:05:41 +0000
 
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M&M makes a basic assumption that higher debt equity ratio will lead to higher required retun on equity because of the greater risk for equity holders in a company with debt. I feel this is more empirical and cannot be quantified as equal to the cost of debt in a leveraged company. hence my submission is that the cost of capital is cheaper in a leveraged company partcularly with tax savings from interest expenses on debt
By Prem Kumar Kunnath, Chief Financial officer, Ithraa Capital  | 11 27 2010 10:33:54 +0000
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the recent example of that is of TATA SONS-in case of CORUS AND JLR acquisition
By ZOHAR BATTERYWALA, Relationship Manager, TAJ INVESTMENT  | 11 26 2010 10:22:18 +0000
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MM's proposition is based on such unrealistic and impractical assumptions that it is rendered useless - the award of the Nobel Prize to them, for this attempt at distracting others from their work, is surprising ! Gearing increases the firms'profitability (& risk)due to two reasons :[1] debt is cheaper than equity, [2]interest on debt is a tax-deductible expense, whereas dividend on equity shares is not !! MM's stipulation that average cost of capital remains constant at all levels of gearing / leverage, fails to explain the benefits arising from use of cheaper debt as also the existence of an optimal capital structure for a firm based on it business risk. As gearing increases, the firm faces increasing financial risk of liquidation because interest on debt is legally enforceable; yet there is an optimal point where WACC is lowest and value of firm is highest !!
By Sharadchandra Joshi, Post Graduate Teacher for Higher Secondary, P P Savani Cambridge International School  | 11 25 2010 17:45:32 +0000
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It would be difficult to comprehend but the fact is that cost of capital is independent of firm's capital structure.
By souren , DIRECTOR NICCO FINANCIAL SERVICES LTD.,, Microfinance Focus Magazine  | 11 26 2010 10:26:17 +0000
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