Critics of the Modigliani-Miller theory argue which of the following are reasons why capital structure matters? I. taxes
II) bankruptcy
III) adverse selection

Question

Quizplus · Accepted Answer

The Modigliani-Miller theory assumes that capital structure does not matter, but many critics argue that it does. Taxes can impact the cost of debt financing and the value of interest tax shields, making capital structure relevant. Bankruptcy risk is another factor, as a heavily leveraged company may face higher default risk and potentially costly bankruptcy proceedings. Adverse selection is also relevant, as a company with a high level of debt may signal to investors that the company is risky, potentially limiting its access to capital or increasing its cost of capital. Overall, all three factors - taxes, bankruptcy risk, and adverse selection - suggest that capital structure can matter in the real world.

Critics of the Modigliani-Miller Theory Argue Which of the Following