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Chapter 7
Modigliani and Miller’s (M & M’s)
gearing theories
3.1 M & M's key assumptions
There exists a perfect capital market in which there are no information costs or
transaction costs.
Debt is risk free and kd remains constant at all levels of gearing.
Investors are indifferent between personal and corporate gearing.
Investors and companies can borrow at the same rate of interest.
3.2 M & M's no tax theory
Under M & M’s theoretical assumptions, and in the absence of tax,
the two opposing factors cancel out exactly, so the WACC (and
business value) is constant at all levels of gearing.
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