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According to financial theory, how you structure a company has no correlation with its success. Therefore the kind of debt financing that Elon is using is just
by btilly 8y ago
According to financial theory, how you structure a company has no correlation with its success. Therefore the kind of debt financing that Elon is using is just fine.
Financial theory and reality tend to agree except in a crisis. Unfortunately crises do tend to come along periodically. How TSLA weathers the next one will be interesting to see.
- spectrum1234 8y agoWhat this isn't true. The theory says some debt is optimal due to taxes. However I am rusty on these courses.
- soVeryTired 8y agoThe Modigliani-Miller 'theorem' is dangerous nonsense. It proves a fact about a model rather than a fact about the real world. From Wikipedia "The basic theorem states that 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". See anything wrong with this picture?
- sah2ed 8y agoI agree with you that the grandparent misinterpreted the theorem as the Wikipedia article includes something similar to your reply: "These results might seem irrelevant (after all, none of the conditions are met in the real world), but the theorem is still taught and studied because it tells something very important. That is, capital structure matters precisely because one or more of these assumptions is violated." [0] https://en.wikipedia.org/wiki/Modigliani–Miller_theorem https://en.wikipedia.org/wiki/Modigliani–Miller_theorem
- soVeryTired 8y agoBut it's already painfully obvious that one or more of the assumptions is violated. That should only be surprising if you've spent years being indoctrinated by academic finance or economics.