Modigliani and Miller concluded that there is no point in adjusting the debt or equity proportions in choosing the capital structure of the firm, but which two important factors did they ignore?

Question

Quizplus · Accepted Answer

Modigliani and Miller ignored two important factors in their conclusion- taxation and financial distress. Taxation is an essential factor to consider while deciding the capital structure, as debt allows for tax deductions, whereas equity does not. Financial distress can also impact the capital structure as too much debt can lead to bankruptcy or default. Inflation and interest rates are also crucial factors to consider, but they were not ignored by Modigliani and Miller.

Modigliani and Miller Concluded That There Is No Point in Adjusting