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Thinking about the Modigliani – Miller framework, what is the rationale to not repurchase shares in...

  1. Thinking about the Modigliani – Miller framework, what is the rationale to not repurchase shares in a particular company? Hint: using finance math to justify your answer, such as the Sustainable Growth Rate or the Internal Growth rate.  

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Answer #1

Answer :- According to Modigliani-Miller (M&M) approach, There is no appropriateness / fairness in repurchasing stocks of any specific company because changes in the capital structure will not affect the total value of the firm/company. The reason (behind no effect on firm value) is that the debt capital is cheap and its more use in capital structure results into high expectation of equity shareholders and this raises the cost of equity capital and therefore, the benefits of low debt cost are offset exactly by the increase in cost of equity capital.

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