FIN 401 - Modigliani-Miller (M&M) Proposition 1 and 2 (with tax) - Part 3

[@sherbanoawan7998]

You are a genius! Loved the M&M series (with and without tax). My textbook was confusing me and you made it so simple!!!!! Digestible finance 101! Keep up the good work!

[@S0RD1U]

I’m having the exam 3hours later. And you saved my life. Love and thanks

[@javiergonzalezreynoso7394]

taking corp finance for college right now and you have saved my life. thank you thank you thank you

[@charliegoff8125]

2 Years old and still amazing thank you

[@AllThingsMathematics]

Happy to hear its helping!

[@christianammeraal8171]

All the way from The Netherlands: thanks for the clear explanation. It helps me very much.

[@agyekumohenedavid3002]

Who else think this guy is the best finance lecturer so far? Give me a like 👍

[@leond5044]

I’ve got a question: why are you just referring to V=FCF/wacc as a check? Because it delivers the the right answer. So couldn’t we use it to calculate the wacc. It faster than calculating the Return on equity first. Btw: amazing explaining videos!

[@jonkingspoint]

Thank you so much! I was stuck on an unlevered value question for my Financial Management course and you saved me!

[@nethminifrancis4492]

this is amazing work...……….you saved me from a huge exam

[@dailingling9499]

I found it is more easier to calculate wacc directly by simply using free cash flow divided by levered firm value instead of using 4 steps.

[@vijayrajashree4694]

Great teaching and I am really enjoying your classes and I don't know how I missed it so far . Thank you,

[@AK-wb4jj]

omg why didn't I find you earlier?? so clear and easy to understand, wish you were my lecturer!!

[@sahalarrale477]

from norway, thanks for this great explanation, my professor could never!

[@vijayrajashree4694]

Really Great teaching. Thank you soo much for your knowledge sharing, also you teaching very clearly and neatly. Excellent and many thanks for giving me this knowledge.

[@黄雨歆]

So appreciated for your detailed explanation! They really help with my test!!!

[@AllThingsMathematics]

Happy to help!

[@vrindayadav]

can't be thankful enough

[@hathawayamato]

Great series! I have a question at 1:45. You said free cash flow is constant despite the capital structure, however, in my understanding FCF takes tax payment into account. So doesn't a different tax burden change the FCF? If so, then under different ratios of debt and equity FCF should be different and not constant...

[@jeronimom1593]

Did you ever find an answer to why he said FCF stayed constant? I agree with your comment

[@jeronimom1593]

It is to my understanding that he did state that Ebit(1-T)=FCF. If that's true it does make sense that FCF stays constant

[@thienyetan2035]

Perhaps he is just assuming FCF is constant. Doesn't have a reason for backup though, that I agree.

[@muazarooj7769]

Thanks for the videos mate. They are very helpful. May Allah bless you

[@AllThingsMathematics]

thank you :)

[@Matthew-kl8iq]

Patrick you are awesome!

[@司徒嫣然]

Thanks for your video, it's very clear and helps me a lot. But I still have a doubt. Since r_U=(D/(D+E))*r_D+(E/(D+E))*r_E, substitute r_U into MM proposition 2(with taxes), you will find MM proposition 2 (with taxes) does not hold. The left side is r_E, but the right side isn't equal r_E after substituting r_U into MM proposition2(with taxes). What's wrong with this and why?

[@kunalshrestha5368]

r_U is for the unlevered firm so it has no debt, thus, the first part of the euation (D/D+E) = 0 and also for the second part (E/(D+E)) = 1 because D=0 and E/(0+E) = 1. This only leaves r_E in the equation which equals to the left side.

[@Ines-tj7cm]

Thank you for the perfect explanation !!

[@leratomothae4120]

Thank you for the clear explanation, but i still have a question on M&M 2 with taxes. How come that the (1-t) also apply to R_u? From the WACC formula with taxes when i solve for R_E my final answer becomes R_E=R_u + [R_u - R_d(1-t)](D/E). Could you please take through the mathematics behind your R_E. Thanks

[@JoseFranco1]

Hi Lerato, I have the same question, but haven't found an answer yet. Have you?

[@saksharsharma9648]

he's not solving that equation per say, he is modifying the previous equation(without taxes)

[@adityarammohan6597]

Have the same doubt Lerato, have you found a solution for it by any chance?

[@vsmeghna8408]

You have explained it very nicely. Thank you!

[@EdwardLeeDesign]

Exceptional stuff! Thanks :)

[@VJarnbjorn]

great series! thank you for that!

[@aaronchan1616]

These stuffs really helped!!! Insane explanation!

[@yoranyoutube]

This really helped me, thank you!

[@AllThingsMathematics]

You're welcome :)

[@jamessmith5622]

Great video's. Have helped me so much. Appreciate it!!!

[@user-cx5wq9rn6e]

you are insane dude

[@AllThingsMathematics]

hopefully in a good way :)

[@sarajebbouri1429]

Thank you so much!! very helpful

[@JonathanTeh]

Assuming Value of Firm = FCF / WACC, then can we just use this formula to find the WACC directly where WACC = FCF / Value of Firm = 20/220? Or are there some constraints that cause us to need to find step 3?

[@LyAn215]

That's what I thought!

[@augustinekabui5293]

A quick way would be, WACCu = Ru = 10% & WACCL= WACCu (1-DT/VL) gives u the same answer

[@ang1188]

youre a star! patrick star!

[@jasmintran-huu2450]

I have to meet you soon!!

[@BarryErasmus-s6g]

Why is it that during step 1: the WACC = Cost of debt (10%), but when you do the calculation for the WACC at the end of the video, the new value is 9.0909%. I understand that having completed the calculation you now have a more accurate figure for the WACC, but doesnt this render the initial calculation in step 1 to be wrong as there is a difference between 10% and 9.0909%? Also if the "New WACC" 9.0909% is used to prove that the firms value is 220M, how can that be the case when previously the WACC (10%) was used in the formula of Vu=FCF/WACC?

[@davidlean7496]

Just wondering why you changed the rE and rD from decimal to whole number and how come the decimal does not give same answer for calculating the rE and the WACC

[@jsjxyz]

You should write a book

[@AllThingsMathematics]

haha one day!

[@Trinhtran-gk7ui]

I am confused about this. Value of a firm is increased with more debt, then the riskiness of the firm is also increase (WACC increase). Is it?

[@salvatoredestradis8068]

The increase in riskiness is for the shareholders and it is represented by the increase in the return on equity. If you watch the firm considering also the bond holders returns, you’ ll understand why the WACC is actually decreasing, since WACC is the weighted average of the returns of shareholders (re) and bond holders (rd = cost of capital). As the leverage increase in a no tax scenario the WACC is constant but in a tax scenario, where interests escape taxes, you’ll get that WACC is decreasing with debt

[@NegroChE6]

Hi. I dont how you obtain the formula of Prop2. The first time it was by the definition of the WACC. But know the WACC is not constant, so why the formula used to obtain the r_E expresion with r_U seems the same as WACC, but if it where WACC=r_U which is not true, since the WACC changes. I hope Im beeing clear.

[@milosbajic4100]

r_U represents the WACC of an unlevered firm, it is derived the same way because that r_U is going to be the same regardless of the level of debt. Does that make it clearer?

[@peacefulbrownie4572]

Thank you so much

[@godfreyphiri8245]

THANKS

[@terryy6819]

Thanks from Republic of Korea. from the lecture, I have one question about cost of equity. Why cost of equity is increased as debt-equity ratio increased? why risk of equity is increased?

[@raffi3o3]

coe is increasing as shareholder demand higher return as of increased risk (bankruptcy risk and agency costs)

[@jinendradesilva]

wow

[@gerardornell4607]

You should be fucking Secretary of Treasury

[@jeffreyoliveira2708]

i owe you a percentage of my future salary when i graduate