Re: Modigliani-Miller (MM) theorem

The thing is your debt is actually subsidised when the grubmint
gives you a writeoff for interest payments but doubly taxes dividends.
Therefore it is normally thought to pay to have a certain amount of
debt to lower (minimise) your weighted average cost of capital. But
MM say that the cost of debt and equity are inversely proportional so
they end up cancelling out. What they mean is if you have a lot of
equity, you can get a better bond rate. If you have less debt, your
equity is more desirable so stockholders demand less dividends. If
you eleiminate the tax effects, MM are probably correct, but taxes
distort everything.

- = -
Vasos-Peter John Panagiotopoulos II, Columbia'81+, Bio$trategist
BachMozart ReaganQuayle EvrytanoKastorian
---{Nothing herein constitutes advice. Everything fully disclaimed.}---
Pataki+JebBush in 2008!

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