QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: hamsterQuoteOriginally posted by: torontosimpleguyThe point is that M&M don't talk about time horizon in debt financing.When we talk about 'infinite' time horizon then cash outflow to serve the debt will eventually exceed the cash inflow from the business activity.the going concern assumption makes life easier bcoz it allows to plug perpetual into a model. e.g. you cannot reason going concern for structured products, project financing, etc... common sense ...1. There is 'perpetual' debt; there is no 'perpetually going' concern.2. Exponential nature of debt can be seen from the following example. If your ancestor borrowed 2,000 years ago just $1 with 5% annual interest, then your debt today is 2.4 *10^42, at least according to Microsoft calculator 3. No business can provide exponential income. So, your debt will inevitably surpass your revenue.yep. that's the reason why indebted entities are condemned to grow, eg politicans worship economic growth (to serve public debt), a ceo of a mnc is pressured to enter new markets (to serve the mncs pension liabilities, and much more). of course there is no infinite growth possible. that is why a firm have to wipe competitors out => their default leaves some space for growth. after many M&As, bankcrupt competitors, an so forth, there are one or few huge survivor firms left. is there a guarantee for survival, or coverage for secured debt? no ... (solutions to let exp-growth run into nothing: investors become obsessed by the free-cash hypothesis and as a result liquidating the monster firms' assets - under the assumption of no additional monetary expansion)
Last edited by hamster
on February 3rd, 2010, 11:00 pm, edited 1 time in total.