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Unformatted text preview: ation of the two overall
sources of financing that maximizes firm value.
8.3.1 Does the firm's debt policy affect firm value?
The objective of the firm is to maximize shareholder value. A central question regarding the firm's capital
structure choice is therefore whether the debt policy changes firm value?
The starting point for any discussion of debt policy is the influential work by Miller and Modigliani (MM),
which states the firm's debt policy is irrelevant in perfect capital markets. In a perfect capital market no
market imperfections exists, thus, alternative capital structure theories take into account the impact of
imperfections such as taxes, cost of bankruptcy and financial distress, transaction costs, asymmetric
information and agency problems.
8.3.2 Debt policy in a perfect capital market
The intuition behind Miller and Modigliani's famous proposition I is that in the absence of market
imperfections it makes no difference whether the firm borrows or individual shareholders borrow. In that
case the market value of a company does not depend on its capital structure.
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12