Modigliani and Miller (MM), in their second article, took account of taxes, bankruptcy, and other factors that were assumed away in their original article. Once they took account of all these assumptions, they concluded that efirm has a unique optimal capital structure. Moreover, a manager can use the second MM model to determine his or her firm's optimal debt ratio.

Question

Quizplus · Accepted Answer

Modigliani and Miller's second article did not conclude that a firm has a unique optimal capital structure and did not provide a formula for determining an optimal debt ratio. Rather, they found that, under certain assumptions, the value of a firm is independent of its capital structure.

Modigliani and Miller (MM), in Their Second Article, Took Account