Question

Suppose the assumptions of MM are true, then what would happen to the market price of shares once the purchase of the large block at $35 a share is completed? Would it rise above $35.75, remain unchanged or fall?

Answer 1

If the assumptions of MM (Modigliani-Miller) are true, the market price of shares would remain unchanged once the purchase of the large block at $35 a share is completed.

Step-by-step explanation:

If the assumptions of MM (Modigliani-Miller) are true, then the market price of shares would remain unchanged once the purchase of the large block at $35 a share is completed. This is because MM's theory of capital structure states that the market value of a firm is determined by its underlying assets and operations, and not by its financing decisions.

According to MM, the value of a firm is derived from its cash flows and the risk associated with those cash flows. The purchase of a large block of shares at a specific price does not change the fundamental value of the firm or its cash flows, thus not affecting the market price of shares.

Therefore, in this case, the market price of shares would remain unchanged at $35.