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Q: finance ( Answered 5 out of 5 stars,   0 Comments )
Subject: finance
Category: Business and Money > Finance
Asked by: fatima1102-ga
List Price: $2.00
Posted: 10 Sep 2005 23:36 PDT
Expires: 10 Oct 2005 23:36 PDT
Question ID: 566672
Joes Manufacturing is recapitalizing by issuing $250 
            in debt and using the proceeds to buy back stock. After the 
            recapitalization, what is the firm's new value?
Subject: Re: finance
Answered By: omnivorous-ga on 11 Sep 2005 09:01 PDT
Rated:5 out of 5 stars
Fatima1102 ?

It stays the same.

Merton Miller, who taught at the University of Chicago?s Graduate
School of Business when I was there and is a very funny guy, explains
the irrelevance of borrowing in the capital structure this way:

"Say you have a pizza, and it is divided into four slices. If you cut
it into eight slices, you still have the same amount of pizza. We
proved that! Rigorously!"

Arnold Kling -- AP Economics
"Corporate Finance: Leverage and the Modigliani-Miller Theorem" (undated)

Can you believe that they gave him a Nobel Prize for that?  Actually,
Franco Modigliani won it in 1985.  Miller won it in 1990:
?The Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in
Memory of Alfred Nobel,? (Lindbeck)

Here?s a good synopsis of the Modigliani-Miller or M&M theorem:
?Modigliani-Miller Theorem?

Google search strategy:
?Modigliani-Miller? Nobel Prize

Best regards,

fatima1102-ga rated this answer:5 out of 5 stars

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