Major Takeaways from Provided Resources
Here are three YouTube videos on Modigliani and Miller
1. Modigliani & Miller – Part 1: https://www.youtube.com/watch?v=SX-UX_n-6mY
2. Modigliani & Miller – Part 2: https://www.youtube.com/watch?v=gxKcxR5p6EA
3. Modigliani & Miller – Part 3: https://www.youtube.com/watch?v=WxFfby_OrPk
1- https://www.investopedia.com/terms/t/traditionalcapitalstructure.asp
2- https://seekingalpha.com/article/4380214-noble-midstream-partners-count-on-distribution-not-
takeover
Please read the articles above and watch the MM videos. What are the three takeaways (in total) from
these resources? Please be specific. If referencing the video, indicate which one and the approximate time
frame you are referencing.
In addition, conduct a little research on Franco Modigliani and Merton Miller. Who were they? What were their
contributions to the field of finance?
Remember that:
1. The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
2. The trade-off theory states that the capital structure decision involves a tradeoff between the costs and
benefits of debt financing
3. It is possible that two firms could have identical financial and operating leverage, yet have different
degrees of risk as measured by the variability of EPS.
4. If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they
would have concluded that 100% debt financing is optimal
5. The factors that affect a firm's business risk are affected by industry characteristics and economic
conditions. Unfortunately, these factors are generally beyond the control of the firm's management
6. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital
structure.
7. The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price
8. Wide variations in capital structures exist both between industries and among individual firms within
given industries. These differences are caused by differing business risks and also managerial attitude
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