The cost of capital, corporation finance and the theory of investment: a refinement

Dave Lane

Applied Economics Letters, 2009, vol. 16, issue 10, pages 1017-1019

Abstract: The proof of Proposition I in the work of Modigliani and Miller (MM) (1958) is based on the mechanism of arbitrage. Two cases are considered: first, the case where the value of the levered firm is larger than that of the unlevered one; second, the case where the value of the levered firm is smaller than that of the unlevered one. The first case involves the investor engaging in personal borrowing. This article shows that the amount borrowed is greater than the amount envisaged by MM, and that the proof of Proposition I is slightly altered.

Date: 2009

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