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Modigliani and Miller Part 2

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M&M Propositions I and II with corporate taxes and no bankruptcy costs.
M&M Part 1 http://www.youtube.com/watch?v=SX-UX_n-6mY
M&M Part 3 http://www.youtube.com/watch?v=WxFfby_OrPk
For more videos http://facpub.stjohns.edu/~moyr/videoonyoutube.htm

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50 Comments

    Popular Comments:

Alex Mochaga . 2019-04-11
Very good!
121 2 . Reply
Derek dJ . 2018-10-27
Thank you Ron!!
121 2 . Reply
Laura Honey . 2017-10-17
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. :)
121 2 . Reply
Joseph Woolley . 2017-05-28
Great Video, very systematic and logical form of teaching, really helped with my corporate finance class!
121 2 . Reply
Malak Aman Khan . 2017-04-29
Nice work really i appreciate this
121 2 . Reply
Cristobal Dominguez . 2017-04-21
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.
121 2 . Reply
William . 2017-01-25
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?
121 2 . Reply
Farzaneh asghari . 2016-12-12
I was having trouble understanding M&M propositions before I found your videos..thanks for simplifying this... :)
121 2 . Reply
iammrsoulmusic . 2016-09-03
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.
121 2 . Reply
Yong Qiang Cheong . 2015-07-27
Hi
121 2 . Reply
pinnedstripe . 2015-04-28
Thank you so much for your excellent videos. They really helped clarifying some doubts!
121 2 . Reply
tboot2 . 2015-04-13
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
121 2 . Reply
informatica Tutor . 2015-01-19
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..:)
121 2 . Reply
Thinesh Thayabaran . 2015-01-18
Really well explained, never thought i would understand this!
121 2 . Reply
Nanito354 . 2014-04-29
Great Explanations. Much appreciated
121 2 . Reply
jena959595 . 2014-01-11
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!!!!
121 2 . Reply
Ronald Moy . 2013-04-30
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.
121 2 . Reply