Paper on Theory of Financial Management

Paper on Theory of Financial Management

Sample Paper

If the paper presented by the two authors is evaluated, it can be seen to have sound arguments that have a persuasive element to them. This is achieved through a combination of theoretical development, empirical evaluation and making good use of examples. The evidence was also substantial enough to raise concerns regarding the points presented about the change required in the way capital structure theory has been looked at.

The work did however come under scrutiny and attracted some criticism for some of the factors it was seen to overlook. The first among these was a questioning of the simplifying assumptions that Modgiliani and Miller made such as the absence of corporate taxes, the lack of consideration for paying investment bankers certain amounts for raising capital. This was accompanied with others such as the lack of legal fees for bankruptcy which negated these potential costs. These assumptions while standard practice in economic model making can not been seen to hold in real life finance which brings into question their ability to alter the framework in which modern finance operates. The other major criticism can be seen from the viewpoint of taxes. This was made through the under estimation made by the authors of the benefits of tax shields. This was supplemented by the concern surrounding information asymmetry in the real world which has a direct impact on some equity issues being successful and others not. It also means that companies face different costs in this regard. Despite these criticisms however, Modgiliani and Miller were able to raise important questions in the world of finance that still form the hallmark of the study being conducted in academic circles of this subject today.

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