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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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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Impact of Dividend Policy on Clientele
- This theory is related to the dividend irrelevance theory presented by Modigliani and Miller, which states that, under particular assumption, an investor's required return and the value of the firm are unrelated to the firm's dividend policy.
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Long-Term Debt
- The actual effect of the firm's capital structure on firm value is a contested topic in financial theory (see Miller Modigliani Theorem).