Final answer:
Financial restructuring refers to changes in a company's capital structure and can include various financial transactions. M&M Proposition 1 states that such restructuring doesn't alter the value of the company's real assets. Therefore, the answer to the student's question is both a and b, meaning financial restructuring does not change the value of real assets and includes transactions that change the capital structure.
Step-by-step explanation:
Financial restructuring does indeed have implications for the company's capital structure and can affect how the value of the company is perceived.
Financial restructuring includes a number of financial transactions that can change the capital structure of a company. It can involve the issuance of new types of financial assets, such as bonds or equity, or the reorganization of existing assets and liabilities.
Importantly, M&M Proposition 1 suggests that in an environment without taxes, bankruptcy costs, agency costs, and asymmetric information, financial restructuring will not change the value of a company's real assets. The value derived from real assets remains the same because these assets' productivity and cash flows do not change purely as a result of alterations in the financial structure
When companies undertake financial restructuring, it is indeed true that they are altering their capital structure, which can include issuing equity in order to retire debt. However, it’s important to understand that restructuring doesn't always mean the replacement of debt with equity; it can also occur in various other forms, such as debt for debt, equity for equity, or a combination thereof. Thus, the comprehensive answer to the student's question is d) both a and b.