FIN 4424 KU Week 2 Proposition by Franco Modigilani Merton Milles Discussion

1. Analyze and discuss the following proposition by Franco Modigilani and Merton Milles (MM): “… when there are no taxes and capital markets work well, the market value of a company does not depend on its capital structure. In other words, CFOs cannot increase value by changing the mix of securities used to finance the company … “. Use hypothetical numerical examples to support your contribution.

2. At the end of 2014, Croydon Corp. paid US $ 855 million in interest on the debt:

to. How much more would this corporation have paid in taxes if it were financed solely with equity?

b. What would have been the current value of Croydon Corp.’s interest tax savings if the company planned to permanently maintain its indebtedness at the 2014 level? Assume an interest rate of 6.5% and a tax rate of 40%.

3. How will the following events affect the size of the company’s optimal investment in current assets?

to. Interest rates increase from 5.5% to 7.5%.

b. Just-in-time stocks are introduced, reducing the risk of stock shortages

c. Clients pressure the company to adopt a softer credit sales policy.

4. Analyze and discuss the following statement: … “Financial planning is necessary because financing and investment decisions are mutually inclusive and should not be made independently” ….