Theory (Week 8)

Question 1

What’s M&Ms capital structure theory (1963) with tax in regards to WACC?

Answer 1

Predicted that the WACC would fall whenever a a company’s gearing would increase.

Question 2

What’s the traditional theory on capital structure?

Answer 2

Predicted that the WACC would initially fall when gearing increased.

Question 3

What’s M&Ms capital structure theory (1958) without tax?

Answer 3

In a perfect market the way a firm finances itself is irrelevant to its value.

A perfect market being no taxes, no transaction costs, perfect information, no bankruptcy costs, efficient markets and homogeneous expectations.

Question 4

What’s M&Ms capital structure theory (1963) with tax?

Answer 4

Debt financing increases value because of the tax shield on interest payments.