Category: Business and Money > Finance
Asked by: fatima1102-ga
List Price: $2.00
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?
Answered By: omnivorous-ga on 11 Sep 2005 09:01 PDT
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) http://arnoldkling.com/econ/saving/corpfin.html Can you believe that they gave him a Nobel Prize for that? Actually, Franco Modigliani won it in 1985. Miller won it in 1990: NobelPrize.org ?The Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel,? (Lindbeck) http://nobelprize.org/economics/articles/lindbeck/ Here?s a good synopsis of the Modigliani-Miller or M&M theorem: Investopedia.com ?Modigliani-Miller Theorem? http://www.investopedia.com/terms/m/modigliani-millertheorem.asp Google search strategy: ?Modigliani-Miller? Nobel Prize Best regards, Omnivorous-GA
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