1 / 13

Economics 434 Theory of Financial Markets

Economics 434 Theory of Financial Markets. Professor Edwin T Burton Economics Department The University of Virginia. On to “accounting”. Balance Sheet. Liabilities. Assets. New Worth. Plus. Revenues A B C Expenses D E F Net Income Taxes Net Income after Taxes. Income Statement.

elke
Download Presentation

Economics 434 Theory of Financial Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Economics 434Theory of Financial Markets Professor Edwin T Burton Economics Department The University of Virginia

  2. On to “accounting” Balance Sheet Liabilities Assets New Worth

  3. Plus • Revenues • A • B • C • Expenses • D • E • F • Net Income • Taxes • Net Income after Taxes Income Statement

  4. Bal Sheets & Inc Statements are linked Bal Sheet Bal Sheet Date 1 Income Statement Date 2 (Period from Date 1 to Date 2)

  5. Back to the Balance Sheet Balance Sheet Liabilities Assets New Worth

  6. The “No-Arbitrage” Principle • Does not require “equilibrium • Means • Cannot make something out of nothing • Cannot make an infinite amount out of a finite investment

  7. Balance Sheet Liabilities Assets Net Worth Modigliani Miller Theorems on Leverage

  8. Value of the Firm According to Modigliani-Miller • Net Worth • Plus Liabilities In other words, ASSETS !!!

  9. MM-1 In a world of no taxes “Value of the Firm” Is independent Of the leverage ratio Irrelevance of Leverage Theorem

  10. Broader Implications from MM-I • US inadequately levered in the 1960’s • US still relatively less levered that rest of world

  11. MM-II “Cost of equity capital” is a linear function of the debt/equity ratio “Cost of debt capital” is whatever the going interest rate is

  12. Other Famous Modigliani-Miller Theorem • Assume no-arbitrage • Assume no taxes • Should firms pay dividends (or do something else with the cash) • Modigliani-Miller Divd Theorem is • It doesn’t matter • Irrelevance of dividends • But if taxes, then dividends are irrational!!!!!

  13. The End

More Related