Critique on Mm Theory - 1159 Words

American economist Franco Modigliani and Merton H. Miller published The Cost of Capital, Corporation Finance and the Theory of Investment (Hereafter MM theory); a paper presented the initial MM theory, which states that under a certain market price process, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm s capital is raised by issuing stock or selling debt. It does not matter what the firm s dividend policy is (Modigliani and Miller 1958). The basic assumptions of MM theory are: 1. The company only has the long-term bonds and common stocks, both bonds and stock trade in the complete capital†¦show more content†¦That is, the higher corporate income tax rate, the more tax deductible the corporation could achieve from financing by liability. In other words, corporations are inclined to finance by liabilities rather than equity financing in relative higher corporate income tax rate countries, and vice versa. Under the actual situation in China, the corporate income tax is much higher than other countries in the world; corporations should prefer financing from debt theoretically (Huang and Zhang 2007). However, actually, the capital structure of Chinese enterprises runs counter to the MM theory and other capital structure theories. The proportion of liability financing in China is far less than the proportion of equity financing (Huang and Song 2006). First of all, there is merely no mechanism in applying MM theory. In accordance with the MM theory, both individual and institutional investors can process arbitrage actions freely in the capital markets. In western well-developed capital markets, there is a wide range of fund-raising channels and other financing options, the arbitrage mechanisms usually affect the markets. However, at present, the market mechanism is not fully developed in China, as well as capital market is under-developed. Thus, these limit the financing options and forms; make it difficult to carry out arbitrage activities. Generally, MM theory cannot be applied. Secondly, the tax-saving of MM theory affects gently in China. As theShow MoreRelatedThe M M Theorem1838 Words   |  8 Pagesmain difference between them is the potential benefit from debt in a capital structure, which comes from the tax benefit of the interest payments.† (Adrienn, 2014, p23) III. MM Mathematical Model MM theory has two main types: MM model without corporate tax and MM model with corporate tax. 1) No corporate tax MM theory: MM put forward two propositions: A. Proposition 1: The total risk (total return) of all the securities holders of the company will not change as a result of changes in the capitalRead MoreCalifornia Pizza Kitchen Case Study Study Analysis1573 Words   |  7 Pages Summarize the Modigliani-Miller (1958) capital structure irrelevance propositions and the concept of debt tax shields. â€Å"Capital structure of a company is the way a company finances its assets.† (E Finance Management 2015) â€Å"The Modigliani-Miller theory states value of the firm is not dependent on the choice of capital structure or financing decision of the firm. If a company has high growth prospect, its market value is higher and hence its stock prices would be high. 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ArrudaFilho EJM and Lennon MM (2011) How iPhone innovators changed their consumption in iDay2: Hedonic post or brand devotion. International Journal of Information Management 31(6): 524–532. Baudrillard J (1981 [1972]) For a Critique of the Political Economy of the Sign. St Louis, MO: Telos Press. Bauman Z (2001) Community: Seeking Safety in an Insecure World. Cambridge: PolityRead MoreWolbachia And Its Effects On The Reproductive Ability Of Its Host And Cause Re Productive Parasitism2100 Words   |  9 Pageshost bacterial cells lysis (Krupovic et al., 2011). The temperate dsDNA bacteriophage WO is an endosymbiont virus of Wolbachia that is only found in arthropod Wolbachia (Metcalf and Bordenstein, 2012). WO phage evolution is not through the Modular Theory but using intragenic recombination, point mutation, purifying selection and deletion (Kent et al., 2011). 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