# lec2 (without answers) - Econ 138 Financial and Behavioral...

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Econ 138 Financial and Behavioral Economics Lecture 2: MM Theorem (II) Payout Policies and Tax Distortions Ulrike Malmendier UC Berkeley Th, January 24, 2008

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Organizational Items Availability of STATA Undergrad computer labs have STATA, e.g. Barrows Hall (basement), STATA 8 or 9 (Intercooled); e.g. Toleman Hall. Ed School lab: Windows Version of STATA I am getting a class account for STATA 9 on Socrates server (SSH into Socrates) .... BUT: apparently only usable if on campus; for graphics you have to be in batch mode rather than interactive mode; generally, the Windows version is much more comfortable (e.g. going back to previous commands and variable names). Other suggestions about on-campus access?
Alternative: purchase one-year license of Small STATA, via GradPlan program between UC Berkeley and STATA, apparentl for \$48 . 00 , or of STATA/IC for \$95 . 00 see . Stata/SE: 32,767 max no. of vars unlimited no. of obs. Stata/IC: 2,047 max no. of vars unlimited no. of obs. Small Stata: 99 max no. of vars 1,000 no. of obs == > Small STATA is not recommendable.

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Course website on bspace Syllabus (and updates), especially book chapters . Lecture slides (and updates), especially some solutions and derivation of the geometric series. Readings, e.g. an essay by Joseph Stiglitz on the impact of the Modigliani-Miller Theorem on Macroeconomics. — Help me with your pictures!
1 Recap of MM (more formal and simpler) MM Theorem : If capital markets are perfect, the capital structure does not a ff ect the value of the fi rm. Informal version : ‘We cannot change the size of the pizza by changing how we slice it up.’ Or : ‘There is no miracle of loaves and fi sh in modern capital structure theory.’ Formal version : Capital structure = choice of / design of fi nancial claims Consider 2 types of fi nancial claims Debt = a claim to a predetermined amount of a fi rm’s income. Equity = a residual claim on the fi rm; equityholders are entitled to all fi rm pro fi ts after debtholders have been satis fi ed.

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Graph (1): Full equity fi nancing (45 Degree Line) Graph (2): Mixed equity- and debt- fi nancing
Denote with V D and V E

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