TITLE:
The Modigliani-Miller Theorem with Financial Intermediation
AUTHORS:
John F. McDonald
KEYWORDS:
Modigliani-Miller Theorem, Financial Intermediation, Valuation
JOURNAL NAME:
Modern Economy,
Vol.2 No.2,
May
17,
2011
ABSTRACT: This paper shows that, if firms borrow at an interest rate that is greater than the rate at which they can lend, the value of a firm declines with the amount borrowed. The model assumes the possibility that a firm may go bankrupt, which introduces the need for financial intermediation. A modified version of the homemade lev-erage examples introduced by Modigliani and Miller [2] is used to introduce the concept. A state-preference model is used for a more formal proof.