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Effect of Reverse Arbitrage Process

The above illustrations establish that the arbitrage process will make the values of both the firms. Thus, Modigliani and Miller show that the value of a levered firm can neither be greater than that of an unlevered firm; the two must be equal. There is neither an advantage and disadvantage in using debt in the firm’s capital structure. The principle involved is simply are able to reconstitute their former position by off-setting changes in corporate with personal leverage. As a result the investment opportunities available to them are not changes in the capital structure of the firm.

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