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> One Nobel winning economic theory leads to an optimal capital structure of 100% debt Too bad the theory is complete nonsense. >> The basic theorem states th

> One Nobel winning economic theory leads to an optimal capital structure of 100% debt Too bad the theory is complete nonsense. >> The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. In short, the theorem states that in conditions that will never exist in the real world, the value of a firm is unaffected by how it's financed. >> the value of the company increases in proportion to the amount of debt used First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia. This is where I rambled about some other related stuff, but decided to just leave it out because fuck everything about mainstream economics.

yummyfajitas 11y ago
In short, the theorem states that in conditions that will never exist in the real world,... If only Modigliani and Miller weren't total idiots. Then they might have repeated their calculations with these assumptions relaxed. First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia. If you bothered to read the article, you'd recognize that Modigliani-Miller actually did the exact calculation you previously criticized them for not doing. Similarly, if you read it, you'd recognize that the claims you think are contradictory actually apply to different circumstances (taxes vs no taxes). What next, medicine is contradictory because "if you don't eat cyanide, you probably won't drop dead, but if you do eat cyanide you will"?
- sukulaku 11y ago
  It doesn't matter what and how they calculated, because your preferences and valuations are not externally determinable. For example, there's no way to calculate how much you'll be willing to pay for a can of cola tomorrow at 17:56, but your decision to buy one (or not) will factor into the economy as a whole. If you buy a cola at noon, that results in a different state for the whole economy than would have resulted from you buying it at 17:56, and so on. An economy is an aggregate of all the individual choices that factor into it, and all of those choices are based on people's individual preferences and therefore incalculable. This is why all of mainstream economics is at best misguided nonsense and academic mental masturbation. In reality, of course, its real purpose is to serve justifications for government intervention in our lives - it's not like Austrian Economics is some arcane knowledge that's only available to a handful of insiders somewhere. You can go to http://mises.org http://mises.org and learn to understand how economics really works.

yummyfajitas 11y ago

In short, the theorem states that in conditions that will never exist in the real world,... If only Modigliani and Miller weren't total idiots. Then they might have repeated their calculations with these assumptions relaxed. First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia. If you bothered to read the article, you'd recognize that Modigliani-Miller actually did the exact calculation you previously criticized them for not doing. Similarly, if you read it, you'd recognize that the claims you think are contradictory actually apply to different circumstances (taxes vs no taxes). What next, medicine is contradictory because "if you don't eat cyanide, you probably won't drop dead, but if you do eat cyanide you will"?

sukulaku 11y ago
It doesn't matter what and how they calculated, because your preferences and valuations are not externally determinable. For example, there's no way to calculate how much you'll be willing to pay for a can of cola tomorrow at 17:56, but your decision to buy one (or not) will factor into the economy as a whole. If you buy a cola at noon, that results in a different state for the whole economy than would have resulted from you buying it at 17:56, and so on. An economy is an aggregate of all the individual choices that factor into it, and all of those choices are based on people's individual preferences and therefore incalculable. This is why all of mainstream economics is at best misguided nonsense and academic mental masturbation. In reality, of course, its real purpose is to serve justifications for government intervention in our lives - it's not like Austrian Economics is some arcane knowledge that's only available to a handful of insiders somewhere. You can go to http://mises.org http://mises.org and learn to understand how economics really works.