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

B1- Financial Management - Essay ExampleIf a firm becomes competent to establish this optimal capital structure, then it provides level best 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 scene 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 agreement 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 fulfi lled by embracing different condemnation 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 freshly 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 personal line of credit 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, because people strived towards buying more equity (Rao, 2010).In MM Model of capital structure without taxes, markets are assumed to be perfect that means at that place are no taxes, no lawyers and no costs of bankruptcy. Now, on cond ition of market being perfect and efficient, Modigliani