MGMP 543, FINANCE
Topic 15 – MM Theory
Professor Kunal Sachdeva
1
,Today’s Topics – Capital Structure
1. Motivation, what is the capital structure of a firm? Why do we care about this?
2. Statement of MM Theory
3. No Taxes
• Proposition 1
• Proposition 2
4. With Taxes
• Proposition 1
• Proposition 2
2
,Motivation: Why Do Firms Issue Securities?
• If the firm has a positive NPV project, they should invest in these
opportunities.
• However, they need money to fund these projects
• Firms issue securities to fund projects!
• This can be debt, equity, or some other financial contract.
• Should the firm issue debt, equity, or both?
>> WHAT ARE THE BENEFITS AND COST OF EQUITY?
3
, Considerations for Equity Financing
• Benefits:
• Aligned incentives
• Increased financial flexibility in the future
• Costs:
• ‘Expensive’
• Offering part of the upside of any project
• Loss of control
• Voting share rights
>> WHAT ARE THE BENEFITS AND COSTS OF DEBT FINANCING?
4
Topic 15 – MM Theory
Professor Kunal Sachdeva
1
,Today’s Topics – Capital Structure
1. Motivation, what is the capital structure of a firm? Why do we care about this?
2. Statement of MM Theory
3. No Taxes
• Proposition 1
• Proposition 2
4. With Taxes
• Proposition 1
• Proposition 2
2
,Motivation: Why Do Firms Issue Securities?
• If the firm has a positive NPV project, they should invest in these
opportunities.
• However, they need money to fund these projects
• Firms issue securities to fund projects!
• This can be debt, equity, or some other financial contract.
• Should the firm issue debt, equity, or both?
>> WHAT ARE THE BENEFITS AND COST OF EQUITY?
3
, Considerations for Equity Financing
• Benefits:
• Aligned incentives
• Increased financial flexibility in the future
• Costs:
• ‘Expensive’
• Offering part of the upside of any project
• Loss of control
• Voting share rights
>> WHAT ARE THE BENEFITS AND COSTS OF DEBT FINANCING?
4
