Capital Structure
Please answer these two questions with at least 4-5 sentences each. Thank you. 1. Bonds are often considered safer investments than stock. As a bondholder, what risks would you face, and how are these risk factors lower for bonds than they are for the stock? 2.The Nobel Prize-winning Modigliani & Miller Theory states that a firms capital structure does not matter (See the M&M Handout under Weekly Lessons Week 6. It is based on three key assumptions: No income taxes Equal borrowing cost- individuals can borrow at the same interest rate as corporations. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs. Are these assumptions reasonable? What are the implications if the assumptions do not hold?
