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

www.FIN401.ca

[@AllThingsMathematics]

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

[@user-wt5nh8zn2b]

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

[@amoszahir7346]

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@Amos Zahir instablaster =)

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@Westley Leonardo I really appreciate your reply. I found the site on google and I'm trying it out atm. Looks like it's gonna take quite some time so I will get back to you later with my results.

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[@missmokkori5558]

This guy has literally saved my semester 🙏

[@Manuel-gk3rv]

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

[@dakshan]

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

[@mudassarhossain8956]

What are you studying

[@hyong-qc3ss]

you sir, have an awesome way of explaining your class!!!

[@African507]

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You are an amazing professor ... really .. simple and valued

[@l.h.7262]

just discovered your videos. I am learning more with you than my professor!! Thank you!

[@andrewday5063]

Thank you for the excellent explanation of this concept! I'm watching all your videos on finance now.

[@kgh2015]

Thank you so much for these videos. All of your videos are great!

[@saajidahtajuddin2635]

I have an online exam since uni is shut down due to the virus. rewatching the lecture podcast didn't do much help to me so THANK YOU SIR your videos help a lot

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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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Saved me for my exam I was doomed to fail!! Haha thanks man

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

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[@jeffreyzheng2010]

crystal clear explanations. thanks, Sir!

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Perfect explanation! Thank you so much!!!

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thank you so much for your teaching.

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Thanks bro for the lecture. Much appreciated!

[@Peach-ui3dy]

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seriously helping me pass my MBA corporate Finance class!!! Thank you so much!

[@AllThingsMathematics]

No worries :))

[@carolinegauthier]

same :)

[@nicos.1200]

Great video, great explanations. Thanks

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this guy explains it better than my professor who is a CFA

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[@rachelmin0105]

this is so clear, thank you!

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Thank you for doing this!

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You saved my life

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Great explanation, thank you!!!

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Can u please tell me what are your video settings on ur dslr camera

[@stanley690925]

Awesome video. Thank you

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Thanks a lot for this helpful video!

[@aklimakanzhigit790]

Thank you so much for the video!

[@mohammedsanisuleiman6159]

You are excellent Patrick...

[@AllThingsMathematics]

Thank you :)

[@hihohiho9455]

Well explained. Thank you!

[@huseyinkamilgezginci791]

Thx, saved my back!!

[@Anglepaat]

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

[@amarbaperchannel]

Thanks Sir🥰 from India

[@bhubesinyama874]

Well explained, thanks man

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very good explanation :)

[@nickno2980]

Thank you so much :)

[@yuliabogdanovych517]

Thank you sooo much!!!

[@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 :)

[@KENZOkm]

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

[@florisvanderveen2777]

AWESOME!!

[@mandarin408]

Nice! Thank you.

[@gracecalubaquib8173]

very well explained thanks!

[@AllThingsMathematics]

You're welcome!

[@nwanneelizabeth8039]

Simple explanation

[@ary__land9510]

Please how did you get the $6?

[@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?

[@benjaminkjaerhansen4733]

does homemade leverage work when there is no tax

[@thanhvannguyen9727]

Thanks mate

[@rajs2050]

Thank you!!!!!!!!!!!!!!!!!!!!!!!!

[@mustafarizvi3834]

Many thanks, Brother ...

[@AllThingsMathematics]

you're welcome :)

[@Humble_African]

God sent!

[@sidraqayyum230]

Thanks

[@sharonarandia3630]

Niiiiiice video

[@AllThingsMathematics]

thanks :)

[@eng.abdulrahmanalotaibi2397]

you are smart

[@amnhaclanguonsong5476]

Great

[@naveenverma8470]

Sir what is assumption of 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.

[@themazmagmon]

nice, nice, nice

[@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?

[@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

[@yashshah4307]

🐐💪🏾

[@ninabrdh8625]

😍😍

[@shewanesgetiye5592]

nice presentation but please Mr. when you doing videos please put part by part or simply say part 1, part2 ........................

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this guy is a god

[@AllThingsMathematics]

Thanks!

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U look cool for a finance guy...😀

[@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

[@emmanuelasantesaforo8084]

@@batatambor Good info ... thanks this have really help

[@abuhanifkhan1670]

Pls give a video on Deferred Tax

[@lloloa9706]

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[@yejin5315]

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

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I can't believe I'm going to report this...

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If you give me the material

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Omg you’re cute 😁

[@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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