Why according to MM2 investors indifferent to leverage?
No tax / no bankruptcy case.
MM2 states that return on equity is proportional to leverage (D/E).
Question then is - why are shareholders indifferent to leverage? Why does it not create shareholder value (again this is no tax, no bankruptcy case)?
In the book I am supposed to study corp fin from the explanation is shit so would appreciate help.
Thanks!
If I remember MM2 correctly, leverage increases return on equity but also increases risk, such that the overall reward vs. risk stays intact. I think this should be generally google-able.
As you take on more debt, the equity position becomes riskier. The idea of MM is that, in a world where leverage is only about splitting the pie in a different way (no tax world), leverage increases the expected return on equity and increases the risk of equity proportionally, such that the risk-adjusted value of the equity doesn't change.
Tempore ab vitae quidem. Et autem ipsum et eum perspiciatis. Iure sint praesentium ut. Sint voluptatum vitae ullam commodi qui esse quam et. Et velit impedit sint repudiandae et.
Delectus minus nam sapiente et. Illo dicta et animi quidem iusto et voluptatem. Voluptatibus qui deserunt vel distinctio corrupti odio beatae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...