MINI CASE David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30 percent debt, and Mr. Lyons wonders why they use so much more debt, and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: a. Business Weekrecently ran an article on companies’ debt policies, and the names Modigliani and Miller (MM) were mentioned several times as leading researchers on the theory of capital structure. Briefly, who are MM, and what assumptions are embedded in the MM and Miller models? Answer:Modigliani and Miller (MM) published their first paper on capital structure (which assumed zero taxes) in 1958, and they added corporate taxes in their 1963 paper. Modigliani won the Nobel Prize in economics in part because of this work, and most
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