Modigliani and Miller Part 2

[@RonaldMoy]

One viewer pointed out that at the :45 mark, I misspoke when I said that the reduction in taxes would reduce net income. It obviously increases net income. Thanks for catching the mistake.

[@farzanehasghari7950]

I was having trouble understanding M&M propositions before I found your videos..thanks for simplifying this... :)

[@laurahoney9988]

your are AMAZING! Thank you for doing this in your spare time - I've learnt so much. I didn't think I could understand this but am looking forward to trying my exam prac questions armed with this knowledge. :)

[@josephw3999]

Great Video, very systematic and logical form of teaching, really helped with my corporate finance class!

[@iammrsoulmusic]

In 1:37, how come the CFFA is equal to EBIT less taxes, when interest is also a cash expense? I guess a better way to explain it is that instead of paying $300 to the government, you only pay $276, which is $24 less since the use of debt creates a tax shield. Just my input. Thanks.

[@pinnedstripe]

Thank you so much for your excellent videos. They really helped clarifying some doubts!

[@cridomZ28]

If you lower tax expense with debt, then your net income will be reduced. In any way MM propositions are good to know so that you can evaluate a financial decision and really know where the extra value is coming from. Remember that you can add value through tax shields but that will only work if the marginal benefits from tax shield out weight the costs of financial distress.

[@FPL_TT]

Really well explained, never thought i would understand this!

[@informaticatutor6508]

Very very nice video sir..perfect..immediately subscribed..sir as i m a English scholar so just pointing small misspoken points..please dont mind sir..at around 3:00 you missed to say8 % and just said $1000 in debt. and same time missed to say "expense" in $80 is interest expense. Just small things sir but i m bound out of my job nature..:)

[@jena959595]

hey Ronald, thanks a lot for your Videos. One question left: I do not understand, how much more valuable the L firm is. I see, that L has a bigger value than U and I also unerstand that this is becaus of higher indebtness. But in this case, I would like to know an exact number of value. Maybe I just don´t understand your example, so I have got the following: U: EBIT 500, taxblable income: 500 taxes(35%) 175, net income 325, CFFA 325 ; the shareholders have a 10% gain on the equity, so the value of the firm is 3250. L: indebted by 40% EBIT 500, debts 1300, interests(5%) 65; taxable income 435, taxes(35%) 152,25, net income 282,75; CFFA 347,75... tax shiled 22,75. Could you please tell me the value of the L firm? I don´t know how to calculate. I really appreciate your help. Greetings from Germany!!!!

[@RonaldMoy]

Take the tax shield and divide it by the interest rate on debt (that's the appropriate rate because the tax shield is generated by interest). That will give you the present value of the tax shield, which is how much more the leveraged firm is worth.

[@jena959595]

Ronald Moy thank you very much.

[@tboot2]

Thanks for the nice tutorials. They really help alot to understand. If I could follow it the right way you have a typo on slide 13-12. M&M Proposition I has to be II. I wish I had your videos for my finals

[@Lof4Music]

Can someone tell me why the bigger CFFA in the levered scenario is better than in the unlevered scenario? The net income in UL scenario is bigger, so the company is left with more funds to work with right? Why would paying $80 in interest of any advantage for a company?

[@cridomZ28]

CFFA is Operational Cash Flows, so in short its EBIT + Depreciation - Taxes, in this case the 24 dollar benefit from tax shield is not being subtracted to EBIT, hence you get a higher cash flow. There are a few types of Cash flows and different ways to discount them.

[@Nanito354]

Great Explanations. Much appreciated

[@malakamankhan1947]

Nice work really i appreciate this

[@anitachung1600]

Thank you!

[@derekdj6790]

Thank you Ron!!

[@alexmochaga9326]

Very good!

[@yongqiangcheong6872]

Hi