Analyze the proposition of Franco Modigliani and Merton Milles (MM)

1. Analyze the proposition of Franco Modigliani and Merton Milles (MM). “…When there are no taxes and capital markets work well, the market value of a company does not depend on its capital structure. In other words, CFOs cannot increase the value by changing the combination of titles that are used to finance the company…” Use numeric hypothetical examples to argue your contribution.

2. At the end of 2014, ABC Corp. paid US $855 million debt interest:

a. How much more would have paid in taxes if the corporation is funded solely with private capital?

b. What would have been the present value of tax savings interest of ABC Corp. if the company permanently keeps the same debt level of 2014? Assume an interest rate of 6.5% and a tax rate of 40%.

3. How do these events affect the size of the optimal investment of the company in current assets?

a. Interest rate increase from 5.5% to 7.5%

b. The inventories are introduced just in time,

c. Customers pressure on the company to adopt a softer policy of credit sales.

4. Analyze the following statement: “…Financial planning is necessary because funding decisions and investment are included and should not be mutually independent...”