Modigliani and Miller’s (M&M) Hypothesis
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Integral to the Keynesian paradigm in economic theory is the study of how investment affects the economy. The Keynesian investment demand schedule relates an aggregate investment to a riskless rate of interest. Modigliani felt that the Keynesian model of investment was inadequate, since it did not deal with uncertainty, and it focused mainly on debt. Financial and managerial economists were more interested in the cost of capital vs. risk. They wanted to extrapolate the idea of uncertainty to the maximization of profit and the value of the firm.1
KeywordsCash Flow Capital Structure Sharpe Ratio Market Valuation Dividend Policy
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