Lecture Note One_Tsing Hua_2009 - Corporate Finance Lecture...

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Unformatted text preview: Corporate Finance Lecture Note 1 1 Lecture Note 1 Valuation under MM Corporate Finance Lecture Note 1 2 What is in This Note? Overview of Modigliani-Miller Proposition I and II (No Tax) Overview of Modigliani-Miller Proposition I and II (with Corporate Tax) Overview of Modigliani-Miller Proposition I and II (with Corporate and Personal Tax) Overview of Modigliani-Miller Proposition I and II (with Asymmetric Information) Reference: Chapters 14, 15, and 16 of RWJJ, Chapters 17, and 18 of BMA Corporate Finance Lecture Note 1 3 Roadmap Overview of Modigliani-Miller Propositions I and II (No Taxes) Overview of Modigliani-Miller Propositions I and II (with corporate Taxes) Overview of Modigliani-Miller Propositions I and II (with both corporate and personal Taxes) Overview of Modigliani-Miller Propositions I and II (with asymmetric information) Corporate Finance Lecture Note 1 4 MM Proposition I (No Taxes) Corporate Finance Lecture Note 1 5 Roadmap Overview of Modigliani-Miller Propositions I Homemade Leverage and Leveraged Equity Assumption of Modigliani-Miller Propositions I Modigliani-Miller Propositions I Corporate Finance Lecture Note 1 6 Capital Structure and the Pie The value of a firm is defined to be the sum of the value of the firms debt and the firms equity. V = D + E If the goal of the firms management is to make the firm as valuable as possible, then could the firm pick the debt-equity ratio that makes the pie as big as possible? Value of the Firm S D E Corporate Finance Lecture Note 1 7 MM Proposition I (No Taxes) Debt Policy is Irrelevant MM Proposition I (No Taxes) Assumption Intuition capital structure is irrelevant S E D S B E B D = Corporate Finance Lecture Note 1 8 Modigliani-Miller Proposition I (No Taxes) The total value of the securities issued by a firm is independent of the firms choice of capital structure. The firms value is determined by its real assets and growth opportunities, not by the types of securities it issues. *This is the very step Modigliani-Miller results, and it holds in an idealized world. Corporate Finance Lecture Note 1 9 Assumptions under Modigliani- Miller Proposition I 1. Capital structure does not affect investment policy 2. No taxes (corporate taxes, personal taxes, etc) 3 Bankruptcy is costless 4. Managers maximized shareholders (E) value, not total firm value ( the Pie , E+D). 5. Perfect and complete capital markets 6. Symmetric information (No black box) Corporate Finance Lecture Note 1 10 Intuition We can create a levered or (un)levered position by adjusting the trading in our own account....
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Lecture Note One_Tsing Hua_2009 - Corporate Finance Lecture...

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