B1- Financial Management Essay Example | Topics and Well Written Essays - 3000 words

B1- Financial Management - Essay Example If a firm becomes competent to establish this optimal capital structure, then it provides maximum returns to shareholders. In spite of this appeal by Modigliani and Miller, the optimal capital structure has not been found by researchers. This forms the basis of evaluation of the model depicted by Modigliani and Miller (Simerly & Li, 2002). The research paper is based on different arguments related to the approach of Modigliani and Miller with respect to its propositions. Modigliani and Miller have proposed two models in this context where one is with effect of corporate taxes and the other in absence of the corporate taxes. The objective of this paper is to critically evaluate the models and present a critical understanding of the Modigliani and Miller propositions. The paper also deals with the identification of certain critical issues associated with the models and demonstrates the analyses of the issues. The purpose of the paper will be fulfilled by embracing different criticism of the two models and evidences related to their practicability. During the Belgium Tax Reform of 1982, the cost of equity was 13%. The cost of equity was tax deductible at the level of corporate during 1982-1983 for equities that were newly issued. The following consequences of the situation were evaluated that depicted the propositions of MM approach when tax rate was considered: equities were issued in highest quantity during the period 1982-1983 which was more than that during the last 13 years. The Belgian stock market increased by 40% in December 1981. The consequences implies that since expected equity return increases with the amount of borrowing in the presence of corporate taxes, hence people strived towards buying more equity (Rao, 2010). In MM Model of capital structure without taxes, markets are assumed to be perfect that means there are no taxes, no lawyers and no costs of bankruptcy. Now, on condition of market being perfect and efficient, Modigliani

Corporate finance Assignment Example | Topics and Well Written Essays - 2750 words

Corporate finance - Assignment Example Stock market index is considered as one of the important economic indicators for the government to watch and formulate its economic policies and strategies to appropriately deal with the economic situation in a country. The benefits of capital markets in a country are multifarious. The capital markets play an important role in capital formation of the country which is essential for the governments’ plans with regard to investment in various sectors of the economy for a balanced economic growth. The governments are not in a position to effectively intervene in the economic process of the nations due to ever-increasing proportion of non-plan expenditure in the budgets. Government spending is very important for generating employment when there is slowdown in economy, to prevent recession. Therefore, the diminishing proportion of funds allocated to plan expenditure by the government should be compensated by private investment through stock markets for maintaining the pace of economic growth. Due to inefficiency of the public sector undertakings and their poor contribution to the economic development in spite of heavy investments made in these undertakings in countries like China and India there has been perceptible shift in policy making by the governments. Most of the public sector undertakings have been privatized by selling their shares in the open market by listing these companies in the stock exchanges by these governments. It has also been noticed that these undertakings’ performances have increased significantly after privatization. These companies are now competing with private companies and are able to mobilize funds for their expansion through the stock markets. This has reduced the financial burden of the respective governments considerably. The stock markets play a crucial role in developing the savings habit of the people. The stock markets are responsible to a considerable extent for entrepreneurial development