Topic:Modigliani and Miller: A Challenge to Capital Budgeting Strategies
Financing corporate purchases and overall capital budgeting usually requires the finance manager to assess tax rates, dividend payout policy, weighting of capital sources, and more. However, the Modigliani and Miller propositions state that, in most situations, it does not matter if the firm’s capital is raised by issuing stock or selling debt.
As a student you might assume studies of capital budgeting strategies will no longer be reviewed in coursework.
Before coming to that conclusion (as stated above), please discuss the principles presented by Modigliani and Miller and explain your agreement or disagreement.
Liltua Company pays $385,000 for real estate plus $20,405 in closing costs. The real estate consists of land appraised at $176,400; land improvements appraised at $58,800; and a building appraised at $184,800.
Dupree Funds is considering the fees charged by two banks. First America charges a flat rate of $0.11 per payment and First Western requires a balance of $500,000(that does not pay interest to Dupree foods), plus $.05 per payment. Assume Dupree’s cost of funds is 9%. What is the number of payments per year where the costs of the two banks will be equal?
51. Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz-Anna GP (a general partnership in which both partners are active owners). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Anna’s property was encumbered by qualified nonrecourse financing of $100,000, which was assumed by the partnership.
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