Why is the determination of earnings quality and persistence important?

Part 1: The Quality of Earnings

Earnings are extremely important to a publicly-traded company and the creditors and investors of that company. However, looking at earnings without regard to the quality of those earnings is hazardous to the health of creditors and investors.

Why is the determination of earnings quality and persistence important?
Explain recasting of the income statement, and give three examples of items that are recasted.
Explain adjusting of the income statement, and give three examples of items that are recasted.

Part 2: Topic: Modigliani and Miller: A Challenge to Capital Budgeting Strategies

Financing corporate purchases and overall capital budgeting usually require the finance manager to assess tax rates, dividend payout policy, weighting of capital sources, and more. However, the Modigliani and Miller propositions state that, in most situations, it does not matter if the firm’s capital is raised by issuing stock or selling debt.

As a student, you might assume studies of capital budgeting strategies will no longer be reviewed in coursework.

Before coming to that conclusion, please discuss the principles presented by Modigliani and Miller, what they are trying to prove within their theory, and if you agree or disagree with the theory’s premise.

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