Escolar Documentos
Profissional Documentos
Cultura Documentos
Famous as Born on Born in Nationality Field Works & Achievements Influenced Eugene Fama Michael Jensen Richard Roll Myron Scholes Economist 16 May 1923 Boston, Massachusetts United States Economics Modigliani-Miller Theorem, Nobel Prize Recipient
Died on
03 June 2000
1- DETAILED INTRODUCTION
1.1-MERTON H.MILLER
Born in Boston, Massachusetts on May 16, 1923, Merton Miller was born to Joel and Sylvia Miller. His father was an attorney and a graduate from Harvard University. Merton followed his fathers footsteps and enrolled in Harvard in 1940. Here, he studied economics and not law. Millers classmate was Robert M. Solow, a noted laureate of economic sciences.
1.3-PERSONAL LIFE
Merton Miller was married to Eleanor and they had three daughters, namely Pamela Chwedyk (1952), Margot Horn (1955) and Louise Lorber (1958). After his first wifes death in 1969, Miller married a woman named Katherine. His daughters, grandsons, his wife and he lived in a townhouse in Hyde Park. He also owned a working farm in Woodstock, Illinois. In his spare time, Miller indulged in bush cutting and gardening
2-PUBLICATIONS
Fama, Eugene F. and Merton H. Miller. 1972. The Theory of Finance. New York, NY: Holt, Rinehart and Winston. ISBN 0030867320 Miller, Merton H. 1986. The Academic Field of Finance: Some Observations on its History and Prospects. Chicago, IL: University of Chicago Miller, Merton H. 1991. Financial Innovations and Market Volatility. Cambridge, MA: Blackwell. ISBN 1557862524 Miller, Merton H. 1997. Merton Miller on Derivatives. New York, NY: Wiley. ISBN 0471183407 Miller, Merton H. 1998. "The M&M Propositions 40 Years Later." European Financial Management, 4(2), 113. Miller, Merton H. 2005. Leverage. Journal of Applied Corporate Finance. 17(1), 106-111. Miller, Merton H. and F. Modigliani. 1958. "The Cost of Capital, Corporation Finance and the Theory of Investment." American Economic Review, 48(3), 261-297 Miller, Merton H. and F. Modigliani. 1963. "Corporate income taxes and the cost of capital: a correction." American Economic Review, 53(3), 433-443. Miller, Merton H. and Myron S. Scholes. 1982. Dividends and taxes some empirical evidence. Chicago, IL: Center for Research in Security Prices, Graduate School of Business, University of Chicago. Miller, Merton H. and Charles W. Upton. 1974. Macroeconomics: A neoclassical introduction. Homewood, IL: R.D. Irwin. ISBN 0256015503
3- AWARDS
4.2-ASSUMPTIONS OF MM THEORY
The basic M&M proposition is based on the following key assumptions:
No taxes No transaction costs No bankruptcy costs Equivalence in borrowing costs for both companies and investors Symmetry of market information, meaning companies and investors have the same information No effect of debt on a company's earnings before interest and taxes
4.3-PROPOSITIONS OF MM THEORY
Consider two firms which are identical except for their financial structures. The first (Firm U) is unlevered that is, it is financed by equity only. The other (Firm L) is levered: it is financed partly by equity, and partly by debt. The ModiglianiMiller theorem states that the value of the two firms is the same.
Without taxes
Proposition I:
where is the value of an unlevered firm = price of buying a firm composed only of equity, and is the value of a levered firm = price of buying a firm that is composed of some mix of debt and equity. Another word for levered is geared, which has the same meaning.
To see why this should be true, suppose an investor is considering buying one of the two firms U or L. Instead of purchasing the shares of the levered firm L, he could purchase the shares of firm U and borrow the same amount of money B that firm L does. The eventual returns to either of these investments would be the same. Therefore the price of L must be the same as the price of U minus the money borrowed B, which is the value of L's debt.
Proposition II:
is the required rate of return on equity, or cost of equity. is the company unlevered cost of capital (ie assume no leverage). is the required rate of return on borrowings, or cost of debt. is the debt-to-equity ratio.
A higher debt-to-equity ratio leads to a higher required return on equity, because of the higher risk involved for equity-holders in a company with debt. The formula is derived from the theory of weighted average cost of capital (WACC). These propositions are true assuming the following assumptions:
no transaction costs exist individuals and corporations borrow at the same rates.
This discussion also clarifies the role of some of the theorem's assumptions. We have implicitly assumed that the investor's cost of borrowing money is the same as that of the firm, which need not be true in the presence of asymmetric information, in the absence of efficient markets, or if the investor has a different risk profile to the firm.
where
is the value of an unlevered firm. is the tax rate ( ) x the value of debt (D) the term assumes debt is perpetual This means that there are advantages for firms to be levered, since corporations can deduct interest payments. Therefore leverage lowers tax payments. Dividend payments are nondeductible
Proposition II:
where
is the required rate of return on equity, or cost of levered equity = unlevered equity + financing premium. is the company cost of equity capital with no leverage (unlevered cost of equity, or return on assets with D/E = 0). is the required rate of return on borrowings, or cost of debt. is the debt-to-equity ratio. is the tax rate.
The same relationship as earlier described stating that the cost of equity rises with leverage, because the risk to equity rises, still holds. The formula however has implications for the difference with the WACC. Their second attempt on capital structure included taxes has identified that as the level of gearing increases by replacing equity with cheap debt the level of the WACC drops and an optimal capital structure does indeed exist at a point where debt is 100% The following assumptions are made in the propositions with taxes:
corporations are taxed at the rate on earnings after interest, no transaction costs exist, and individuals and corporations borrow at the same rate
5-DEATH
Miller died on June 3, 2000 of lymphoma at the age of 77. The dean of the Chicago University, Robert Hamada, said, Miller was the founder of modern finance and the person who fathered the discipline from an institutional field of study to one that is truly a legitimate and well-accepted part of economics and business