👨‍🏫 L10 Capital Structure 1

📖 Berk, DeMarzo and Harford Sections 16.1 – 16.3

General Tip: If you are ever asked for the value of levered equity, there is a good chance you’ll want to use MM1. Just plug all the numbers you know into the MM1 formula and solve for E:

$$E + D = V^U$$

(The full version of the MM1 formula is $V_L=E+D=V_U$. Only the relevant portions for calculating E are shown above.)

For a review of the big ideas and intuition of this lecture, see: 🔎 Capital Structure big picture.

The original paper by Modigliani and Miller can be downloaded from the Harvard Library. Here is a shortcut (please do not redistribute).