And S&P, Moody's and Fitch were not up to the task. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
"And in this episode of Lords of the Bullshit Dildo, the Halfwit, explains why leveraging a firm's equity capital by 300% is a really peachy-keen idea and why doing so does not affect the firms bond rating." A doo run-run-run, a doo run-run
Are you talking about the Modigliani-Miller Theorem?
The Modigliani-Miller Theorems ... The first Modigliani-Miller theorem concerns the question of how the market value of a firm is affected by the volume and structure of its debts. The central proposition of the theorem gives a clear answer to this question: neither the volume nor the structure of the debts affects the value of the firm provided that the financial markets work perfectly, that there are no taxes and that there are no bankruptcy costs. ... In a later paper, Modigliani and Miller formulated another theorem stating that, for a given investment policy, the value of a firm is also independent of its dividend policy. A dividend increase, for instance, certainly increases shareholder's incomes, but this is neutralized by a corresponding reduction in share value. The two Modigliani-Miller theorems hold good, irrespective of individual differences between shareholders' valuations of risk, leverage effects, durability of loans, etc. The logic of the theorems rests in fact upon the assumption of perfect markets, namely that a shareholder can always, through his own borrowing or lending, compose his asset portfolio as he sees fit and that he can, without costs, give it the composition he desires with respect to risk, leverage, etc. lf for instance the risk level of a firm's assets is increased, the shareholders can neutralize this by lowering the risk of other assets in their portfolios. ... The Modigliani-Miller theorems represent a decisive break-through for the theory of corporate finance, and have had a great impact on later research in this area. Thus the scientific value of the authors' work is by no means limited to the formulation of the theorems, but refers to a great extent also to the introduction of a new method of analysis within the discipline of corporate finance. While the idea of treating financial decisions as a market allocation problem is perhaps not completely new, it was Modigliani and Miller who first used it for stringent analysis, thereby laying down guidelines for further research in this area.
...
The first Modigliani-Miller theorem concerns the question of how the market value of a firm is affected by the volume and structure of its debts. The central proposition of the theorem gives a clear answer to this question: neither the volume nor the structure of the debts affects the value of the firm provided that the financial markets work perfectly, that there are no taxes and that there are no bankruptcy costs.
In a later paper, Modigliani and Miller formulated another theorem stating that, for a given investment policy, the value of a firm is also independent of its dividend policy. A dividend increase, for instance, certainly increases shareholder's incomes, but this is neutralized by a corresponding reduction in share value.
The two Modigliani-Miller theorems hold good, irrespective of individual differences between shareholders' valuations of risk, leverage effects, durability of loans, etc. The logic of the theorems rests in fact upon the assumption of perfect markets, namely that a shareholder can always, through his own borrowing or lending, compose his asset portfolio as he sees fit and that he can, without costs, give it the composition he desires with respect to risk, leverage, etc. lf for instance the risk level of a firm's assets is increased, the shareholders can neutralize this by lowering the risk of other assets in their portfolios.
The Modigliani-Miller theorems represent a decisive break-through for the theory of corporate finance, and have had a great impact on later research in this area. Thus the scientific value of the authors' work is by no means limited to the formulation of the theorems, but refers to a great extent also to the introduction of a new method of analysis within the discipline of corporate finance. While the idea of treating financial decisions as a market allocation problem is perhaps not completely new, it was Modigliani and Miller who first used it for stringent analysis, thereby laying down guidelines for further research in this area.
No idea where your quote came from; it sounds like someone from the Chicago School.
Oh .. wait a minute. Was it part of the study materials for that Analyst/Broker Test you took a while ago? (Please no. PLEASE, PLEASE, PLEASE.)
This is just beautiful:
The logic of the [Modigliani and Miller] theorems rests in fact upon the assumption of perfect markets, namely that a shareholder can always, through his own borrowing or lending, compose his asset portfolio as he sees fit and that he can, without costs, give it the composition he desires with respect to risk, leverage, etc. If for instance the risk level of a firm's assets is increased, the shareholders can neutralize this by lowering the risk of other assets in their portfolios.
I'm going to print it out and any time I need a good laugh - I'll look at it. A doo run-run-run, a doo run-run
Follow the link.
Was it part of the study materials for that Analyst/Broker Test you took a while ago? (Please no. PLEASE, PLEASE, PLEASE.)
I suppose it should be, but that's not where I got it from. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
A doo run-run-run, a doo run-run
