I have a basic understanding the MM theorems, but what exactly does one mean by a violation of the MM propositions?
Heres a question from a mock i took recently…
“The team suggests reducing the divident payout ratio from 40 to 20%. Despite how variable earnings can be the team belives that additional earnings retained b the firm will reduce debt to target levels in a 5 year time span and reduce the cost of equity as the debt is decreased”
Based on the MM propositions without taxes the statement is
B) Incorrect, as MM Prop 1 is violated
C) Incorrect becase MM Prop 1 and Prop 2 are violated
Can anyone please help!