FIN 401 - Modigliani-Miller (M&M) Proposition 1 and 2 (no tax) - Part 1

[@AllThingsMathematics]

Hey everyone, check out my website www.FIN401.com to see more of my videos on Capital Structure.

[@ΑντρεαςΚ-ω7κ]

how can show that the share price is constant when the firm repurchanging shares( no taxes)?

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This series about M&M is literally the main reason I passed my exam today. Thank you so much man!

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I passed my finance final thanks to you! You're the man! Thank you so much Patrick

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What are you studying

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Why don’t teachers explain things like this gentleman, believe you deserve to teach in top universities not in KZbin, thumps up and sub

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[@AllThingsMathematics]

No worries :))

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Clear message, clear structure, easy to understand, thank you

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[@AllThingsMathematics]

Thank you :)

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[@AllThingsMathematics]

its on my site, www.allthingsmathematics.com

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crystal clear explanations. thanks, Sir!

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[@gracelee1381]

Perfect explanation! Thank you so much!!!

[@nicos.1200]

Great video, great explanations. Thanks

[@HuongNguyen-vc5lf]

If you borrow debt to repurchase shares and the debt has an interest, how it is gonna change the debt and equity? total debts =($120000+ interest), and Equity= Total assets - total debts. Is that correct?

[@OlgaBergInternational]

I do not understand why we are dividing 300 000 by 50 000. These are outstanding shares, we do not know how many shares within 300 000, correct?

[@franco8019]

Awesome sur tomorrow i have exam i hope i may to manage with such kind of question in exam if i'll face with them :)

[@benjaminkjaerhansen4733]

does homemade leverage work when there is no tax

[@martin-georgiev]

Thanks bro for the lecture. Much appreciated!

[@appygao8673]

Great, your explanation rocks!

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[@tongtongli4141]

Thank you for doing this!

[@vishuraja25]

What about the interest payments that arise with debt? Where do they go in balance sheet and don't they affect the market value of the company?

[@AllThingsMathematics]

Hi Raja, couple of things: 1) interest payments go on the income statement, not the balance sheet 2) interest payments affect the value of a company when there are taxes, because they are tax deductible and reduce taxes to be paid (or increase tax shield). If you see my videos on M&M (with taxes), I go into more detail on this.

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Bro you came in clutch!

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Please how did you get the $6?

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Thanks Sir🥰 from India

[@yefaobeng4936]

Interesting topic although I’ve few doubts: 1- The repurchase of shares comes when there are shares out in the market and from the example this is not shown. 2- A part from this the demonstration looks wired: if I take on debt I will have more cash in my assets taking the 300K up to 420K. My equity will remain the same 300K (no dilution or accretion is fine) and debt will increase to 120K. The value of the company will stay the same because EV = Equity + Net debt so 300 + ( 120 - 120 ). Does it sound fair??

[@aieshijain]

1. The repurchase is happening because there are 50,000 shares outstanding in the market. Shares are being repurchased from these. 2. It does rise from 300K to 420K. However, the very rule of MM1 (without taxes) is that the value of the firm remains constant when it becomes levered from being unlevered. Vu = VL. Hence, the 120K rise in firm value due to the debt is actually compensated by the fall in equity value so that the overall asset value stays constant. Hope this helps!

[@yefaobeng4936]

@@aieshijain Thank you for the reply. First of all mine it's just a shared though. 1. Good to know about the shares because this was not stated. 2. I completely agree with you as well as the MM1 theorem: I believe the first assumption of MM is met since the value of the firm does not change and this is not because the value of the equity decreases unless the company is in a distress situation. Hence 420 on the asset side and the 300 + 120 on the Equity & Liability still holds since the value of the firm will be EV = Equity + Net debt so that 300 + ( 120 - 120 ) = 300. Here it comes the second theorem of MM that states that the debt is increasing the risk of the Equity holders so what the change will be the return on equity and not the value of the Equity per se. Moreover, the increase in debt is not having a dilutive effect on Equity, in this case if the value of equity decreases and the shares + the 50 new will create a dilution effect. Do you agree on that?

[@maricelagutierrez816]

@@aieshijain I was confused too still am but just a lil. Thanks

[@marianavargas6660]

This helped so much! Thank you!!!!!!!

[@mustafarizvi3834]

Many thanks, Brother ...

[@AllThingsMathematics]

you're welcome :)

[@gracecalubaquib8173]

very well explained thanks!

[@AllThingsMathematics]

You're welcome!

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[@AllThingsMathematics]

thanks :)

[@Anglepaat]

Good Afternoon sir, but does the assumption that share prices is constant only apply if the debt does not have an interest payment?

[@meymunaali7850]

What a great Vedio.thank you so much

[@colinchan790]

Great explanation, thank you!!!

[@yejin5315]

How come you said market value = company asset value ??? Asset value should be equals to book value.

[@batatambor]

I dont quite understand how you are relating Assets' book value to company's value, since company value is related to discounted cashflows and assets' value is related to accounting value at the balance sheet. That said equity book value for a 100% equity firm doesn't translate the market value of the firm. In the exemple you gave, if a company borrows 120 of debt to buyback shares, in the balance sheet you will have equity book value (that does not necessarily match up equity market value) and debt book value (that actually match up current share's market value). How are we supposed to deal with that?

[@AllThingsMathematics]

Hi Ricardo, that's a good and fair question. I'm assuming that all values on the "balance sheets" in the video are Market Value. Yes, balance sheets are usually based on book value, but think of these as like "market value balance sheets". So the Assets, Debt and Equity are always based on market value. I could've mentioned that in the video to clarify. Thanks for bringing it to my attention.

[@batatambor]

Thank you for replying

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Thank you so much for the video!

[@KENZOkm]

So does the company own the 20,000 shares and the other 30,000 are public?

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Sir what is assumption of this

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[@AllThingsMathematics]

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[@mishadaro9759]

I didn't understand why assets are still 300k after borrowing money. Let's suppose I have 5 bucks and I borrow another 5 bucks. That means I have 10 bucks, so my assets are 10 bucks. Isn't this how money works?

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[@AllThingsMathematics]

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