Question

Give examples to criticisms of Irrelevant Theory

Answer 1

Critisism of irrelevance preposition theory

Explanation:

Irrelevance theory states that if income tax and distress costs does not occur or are not present in a business environment then financial leverage may not affect or does not effect the value of the company.

But the criticism of this theory is that It lacks realism in the sector of business. because income tax and distress cost with many other factors like profit, assets and market opportunities influence a firm's value and its capital structure.

For an example we can imagine a company name XYZ which is valued at 50000$ . All its valuation come from the assets that this business owns. Now, according to the irrelevance theorem, regardless of this companie's capital structure the valuation of the company will remain same.

But the role of interest rates and taxes, can not be fully eliminated because that could lead significantly affect on its operational expenses and valuation in the accounting books of the company. and that is the critisism of this theorm.

Answer 2

Answer:

Explanation:

Criticisms: a)Irrelevance of Dividends:Following propositions of dividend are impracticable and unrealistic--Investors can switch between Capital Gains and Dividends. -Dividends are irrelevant, and-Dividends do not determine the Firm Value. ... A different capital structure, might alter the entire investment decision.