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The cost of capital, corporation finance and the theory of investment: a refinement

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  • Dave Lane

Abstract

The proof of Proposition I in the work of Modigliani and Miller (MM) (1958) is based on the mechanism of arbitrage. Two cases are considered: first, the case where the value of the levered firm is larger than that of the unlevered one; second, the case where the value of the levered firm is smaller than that of the unlevered one. The first case involves the investor engaging in personal borrowing. This article shows that the amount borrowed is greater than the amount envisaged by MM, and that the proof of Proposition I is slightly altered.

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  • Dave Lane, 2009. "The cost of capital, corporation finance and the theory of investment: a refinement," Applied Economics Letters, Taylor & Francis Journals, vol. 16(10), pages 1017-1019.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:10:p:1017-1019
    DOI: 10.1080/17446540802345448
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    Cited by:

    1. Wang, Qian & Du, Zhuo-Ya, 2022. "Changing the impact of banking concentration on corporate innovation: The moderating effect of digital transformation," Technology in Society, Elsevier, vol. 71(C).

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