Modigliani–Miller theorem
Okay kiddo, do you know what money is? It’s something that we use to buy things we want like toys, food, and clothes. And companies use money too, to buy things they need like equipment, buildings, and materials to make their products.
Now, think about the company you know, let’s call it ABC Company. ABC Company can get money in two ways: borrowing it from a bank or selling shares of the company to other people who will invest in it.
The Modigliani-Miller theorem is a really hard name for a big idea that says how a company gets its money doesn’t really matter to the value of the company.
Let’s say ABC Company needs to raise $1 million to build a new factory. They could borrow it from a bank, which means they would have to pay interest on the loan. Or they could sell shares of the company to people who want to invest in it. Those people would then own a small part of the company and would expect to get a share of its profits.
According to the Modigliani-Miller theorem, the way ABC Company gets the $1 million doesn’t matter because the value of the company will stay the same either way. So, whether ABC Company borrows the money or sells shares, its value will still be the same.
Why is this important? Well, it helps companies make decisions on how they want to get money. It also helps investors understand the value of a company and make good choices when they decide to buy or sell shares.
So, the Modigliani-Miller theorem is just a fancy way of saying that it doesn’t matter how a company raises money because it won’t affect how much the company is worth.
Now, think about the company you know, let’s call it ABC Company. ABC Company can get money in two ways: borrowing it from a bank or selling shares of the company to other people who will invest in it.
The Modigliani-Miller theorem is a really hard name for a big idea that says how a company gets its money doesn’t really matter to the value of the company.
Let’s say ABC Company needs to raise $1 million to build a new factory. They could borrow it from a bank, which means they would have to pay interest on the loan. Or they could sell shares of the company to people who want to invest in it. Those people would then own a small part of the company and would expect to get a share of its profits.
According to the Modigliani-Miller theorem, the way ABC Company gets the $1 million doesn’t matter because the value of the company will stay the same either way. So, whether ABC Company borrows the money or sells shares, its value will still be the same.
Why is this important? Well, it helps companies make decisions on how they want to get money. It also helps investors understand the value of a company and make good choices when they decide to buy or sell shares.
So, the Modigliani-Miller theorem is just a fancy way of saying that it doesn’t matter how a company raises money because it won’t affect how much the company is worth.