CRITICISMS OF THE MM ANALYSIS

CRITICISMS OF THE MM ANALYSIS

There are four conditions that must be met in order to validate the MM analysis and
produce the above results:

1. No costs are imposed on the firm when it defaults on debt payments or goes bankrupt.

2. Investors must be able to do their own borrowing, using "home-made leverae", if they desire higher returns (with higher risk) than the returns provided by debt free
or low-debt firms.

3. Investors must be able to undo the leverage achieved by a corporation by purchasing a proportionate share of all the outstanding claims against corporate income.

4. Personal taxes must be neutral with respect to the choice between debt and equity.