Limitations Homework Help

Limitations

Does the MM hypothesis provide a valid framework to explain the relationship between capital cost of capital and total value of a firm? The most crucial element in the MM Approach is process which forms the behavioral foundation of, and provides operational justification MM hypothesis. The arbitrage process, in turn, is based on the crucial assumption of substitutability of personal/home-made leverage with corporate leverage, The validity of hypothesis depends on whether the arbitrage process is effective in the sense that personal is a perfect substitute for corporate leverage. The arbitrage process is, however, not realistic and the exercise based upon it is purely theoretical and has no practical relevance.

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