QuoteOriginally posted by: BullBearQuoteOriginally posted by: daveangelso what is the problem mr bullbear ?A)1. leverage2. dumb assumptions................B)Taxes: The theorem uses the lousy regulation on corporate taxes to show how to screw the State in favor of corporations, i.e., wealth transfer from the State/individuals to Corporations!C)I can try to reformulate [metaphorically] the theorem to a more current theme, as follows:Consider 2 otherwise equally "wealthy" countries:a. Country A with no debt [e.g. China]b. Country B almost bankrupt and hence with a pile of debt [e.g. UK]Theorem: The debt/savings mix is irrelevant when an investor is deciding where to put his money / savings... So an investor should be indifferent while choosing to invest his savings in China or in the UK.I think you have a fundamental misunderstanding of M&M I (or more likely you dont and are just trying to be provocative). all this says is that the value of a firm or enterprise is independent of the way it is financed. the firm consists of assets (factories, people, brands) on the one side and liabilities and equity on the other. if there are no taxes and bankruptcy laws then the lhs (asset side) is independent of the mix of equity and debt. in most places interest expense comes above the line ie it is tax deductible meaning that there is an advantage to issuing bonds and int he limit the fim should be 100% debt financed. bankruptcy laws give the debt holders valuable rights but also give equity holders significant optionality. In reality, the conditions udner which M&M I hold cannot be observed anywhere so it is a moot theorem. however, it is a good framework to udnerstand capital structure.
Last edited by daveangel
on January 26th, 2010, 11:00 pm, edited 1 time in total.
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