HomeCFACFA Level 2CFA Level 2 – Corporate Finance: Modigliani-Miller Proposition I & 2 (With Taxes)

CFA Level 2 – Corporate Finance: Modigliani-Miller Proposition I & 2 (With Taxes)

  • May 21, 2020
  • Posted by: Fabian Moa, CFA, FRM, CTP, AFM, FMVA, FSA Credential
  • Categories: CFA, CFA Level 2
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CFA Level 2

Topic: Corporate Finance

Reading: Capital Structure

 

In this video, we cover Modigliani-Miller’s Proposition I and II, with taxes. We then cover an example to calculate:

1) the value of the unlevered firm,

2) the value of the levered firm,

3) the equity value,

4) the cost of equity,

5) WACC

With taxes, MM Proposition I implies that we can increase the value of the firm by using a lot of debt. MM Proposition II then implies that we should use a lot of debt to reduce WACC.

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