MANAGEMENT

Detailed explanation-1: -According to Modigliani and Miller, value is independent of the method of financing used and a company’s investments. The M&M theorem made two propositions: Proposition I: This proposition says that the capital structure is irrelevant to the value of a firm.

Detailed explanation-2: -Therefore, Gross Profit Method is not an approach to the Capital Structure.

Detailed explanation-3: -Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.

Detailed explanation-4: -The traditional theory of capital structure says that a firm’s value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease if there is too much borrowing. This decrease in value after the debt tipping point happens because of overleveraging.

Detailed explanation-5: -Miller and Modigliani’s dividend irrelevance theory is sometimes known as the homemade dividend theory. It suggests that a shareholder can earn as much money as in the case of dividend by selling the shares in the market. Hence, the investors are indifferent to the dividend distribution policy of a company.