If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

Question

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Miller and Modigliani's theory assumes that bankruptcy costs do not exist, but in reality, the cost of bankruptcy can be substantial for a firm. Including these costs would alter their conclusion that 100 percent debt financing is optimal for the firm.

If Miller and Modigliani Had Considered the Cost of Bankruptcy