Examples of Miller-Modigliani hypothesis in the following topics:
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Discounted Dividend vs. Corporate Valuation
- One common technique is to assume that the Miller-Modigliani hypothesis of dividend irrelevance is true and, therefore, replace the stocks's dividend D with E earnings per share.
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Dividend Irrelevance Theory
- Economists Modigliani and Miller put forth a theory that only the firm's ability to earn money and riskiness of its activity can have an impact on the value of the company; the value of a firm is unaffected by how that firm is financed.
- Under these frictionless perfect capital market assumptions, dividend irrelevance follows from the Modigliani-Miller theorem.
- Since the publication of the papers by Modigliani and Miller, numerous studies have shown that it does not make any difference to the wealth of shareholders whether a company has a high dividend yield or if a company uses its earnings to reinvest in the company and achieves higher growth.
- Merton Miller, one of the co-authors of the capital irrelevance theory which implied dividend irrelevance.
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Leverage Models
- Models that allow us to interpret appropriate financial leverage include the Modigliani-Miller theorem and the Degree of Financial Leverage.
- The first and most famous, the Modigliani–Miller theorem, forms the basis for modern thinking on capital structure.
- The Modigliani–Miller theorem is also often called the Capital Structure Irrelevance Principle.
- By relaxing the assumption of no taxes, Modigliani-Miller tells us that there are advantages for firms to be levered, since a company's interest payments are tax-deductible.
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Optimal Capital Structure Considerations
- The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure (though it is generally viewed as a purely theoretical result, since it disregards many important factors in the capital structure decision).
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Elements of Life
- However, most currently accepted models draw at least some elements from the framework laid out by the Oparin-Haldane hypothesis.
- This was demonstrated in the Miller–Urey experiment by Stanley L.
- Miller and Harold C.
- The polymerization of nucleotides into random RNA molecules might have resulted in self-replicating ribozymes (RNA world hypothesis).
- An outline of the apparatus used by Miller and Urey.
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Residual Dividend Model
- The Residual Dividend Model is an outgrowth of The Modigliani and Miller Theory that posits that dividends are irrelevant to investors.
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Tax Considerations
- Miller and Modigliani assume that in a perfect market, firms will borrow at the same interest rate as individuals, there are no taxes, and that investment decisions are not changed by financing decisions.
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Cost of Capital Considerations
- If there were no tax advantages for issuing debt, and equity could be freely issued, Miller and Modigliani showed that, under certain assumptions, the value of a leveraged firm and the value of an unleveraged firm should be the same.
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Capital Structure Overview and Theory
- Modigliani and Miller created a theory of Capital Structure in a perfect market.
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The budget constraint: balancing income, consumption, and saving across time
- As a result, four different models attempted to explain the affect of time on consumption and saving decisions: Fisher's Model of Intertemporal Consumption, Modigliani's Life Cycle Income Hypothesis, Friedman's Permanent Income Hypothesis, and Hyperbolic Discounting.
- The Life Cycle Hypothesis (LCH) model defines individual behavior as an attempt to smooth out consumption patterns over one's lifetime somewhat independent of current levels of income.
- Friedman's Permanent Income Hypothesis is one of the models that seeks to explain this apparent contradiction.
- According to this hypothesis, permanent consumption is proportional to permanent income.