Business Finance Homework Help

Part One:

The Nobel Prize winning Modigliani & Miller Theory states that a firm’s capital structure does not matter (See the M&M Handout attched.) It is based on three key assumptions:

1. No income taxes
2. Equal borrowing cost- individuals can borrow at the same interest rate as corporations.
3. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs.

Are these assumptions reasonable?

What are the implications if the assumptions do not hold?

Part Two:

Bonds are often considered safer investments than stock. As a bondholder, what risks would you face, and how are these risk factors lower for bonds than they are for stock?

Part Three:

Read the article on “How to adjust for Risk in Capital Budgeting”.

http://smallbusiness.chron.com/adjust-risk-capital…

Though the author calls these “steps” they are actually different methods. They may overlap in accounting for risk, and if you were to do all of them, you may end up with a more negative result than even the ‘worst case’. For example, Steps 1 and 3 both essentially adjust the discount rate.

Anyway, if you were to choose only one of these methods to adjust for risk, which one would you choose and why?

Part Four:

Watch the video on issuing stock for a private corporation.

It is a simpler process than for a publicly traded corporation. Considering this and other factors, will the capital structure be different for a private corporation?