Economics and Finance

Do you believe in MM proposition effective to explain a firm’s capital structure in the capital market? We have learned a revised version of the formula originated from the MM proposition in this chapter, then we now simply summarize their financial choice: benefit and cost. You can now have a theoretical framework for why a firm presents such a level of debt (or equity) based on a simple framework and factors, then I believe it’s a really useful summary for understanding the player’s move in the market. However, you could not agree with all these theories. Do you agree or disagree with MM proposition or optimal capital trade-off theory? Why or why not? Could you explain your reasons with illustrative examples, actual phenomena, or any reliable sources to support your argument?

You are now an undergraduate expert in corporate finance. The whole semester, starting with a time cost valuation method like NPV, we almost finalize our knowledge trip with a simple, but powerful framework to explain the firm’s financial behavior in the market. It’s not limited to US companies, but also any corporate entities in the world faced with the same problems and they decide their structure to continue and survive. But as you see in the textbook, there are still many unclear parts of the capital market and the firm’s behavior. Before you jump into the complicated world, I really want to ask your philosophical mind to understand the theory. Based on all we have learned in this course, what do you think? Could you give me some details, reasons and your “faith”?