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What do you mean by 'overhang of debt'? Debt and equity are equally valid ways to finance projects. See https://en.wikipedia.org/wiki/Modigliani%E2%80%93Mille
by eru 1y ago
What do you mean by 'overhang of debt'?
Debt and equity are equally valid ways to finance projects. See https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo... for the spherical cow version, but this holds approximately under real world conditions, too.
In general, I share you skepticism and agree that exponential extrapolation should be done only very carefully at best.
- mamonster 1y agoYour link itself says that in presence of taxes and tax deductible interest payments, i.e every single jurisdiction you care about, your firm can be significantly better off with debt. Saying debt and equity are equally valid suggests that you should be fine with a 100% equity financed company, which is completely false.
- eru 1y ago> Saying debt and equity are equally valid suggests that you should be fine with a 100% equity financed company, which is completely false. I assume you mean 100% debt financed? In any case, that's also mostly fine and happens in practice. As soon as that dips above 100%, conceptually your creditors turn into shareholders.
- mamonster 1y agoNo, I meant equity. If you are not using significant (20%+ of capital at a minimum)debt in your capital structure, you are almost guaranteed to be making a financial mistake.
- eru 1y agoIt depends on your industry and stage of your company and jurisdiction. Many software startups run with 100% equity, and I don't think they are all idiots. A pet peeve of mine is people complaining about too much leverage, but then not doing anything about the tax systems making debt financing cheaper compared to equity.
- eru 1y agoP.S. Some companies even have more than 100% equity. In a sense: when their market capitalisation exceeds their enterprise value.