Every student loves the Nobel-prize-winning theory of capital structure irrelevance in a world of perfect competition without taxes or private information (and no transactions costs), formulated by Modigliani and Miller, or M&M for short. Suppose there are no personal or corporate taxes and no transactions costs nor private information. In this perfect world, LGB and FJB are crypto issuers, Bitcoin competitors, not yet bankrupt like FTX, identical in all respects, except that LGB is unlevered and FJB has $1,000,000 of 10% bonds outstanding. Assume that EBIT is $300,000 for both, and that the cost of equity to LGB is 15% and the cost of equity to FJB is 20%. Next assume valuations of LGB = $2,200,000 and FJB = $2,000,000. Using the M&M propositions, demonstrate how to make a riskless profit from LGB and FJB without investing a penny of one's own wealth and yes, LGB is the famous "Let's Go Brandon"
Every student loves the Nobel-prize-winning theory of capital structure irrelevance in a world of perfect competition without taxes or private information (and no transactions costs), formulated by Modigliani and Miller, or M&M for short. Suppose there are no personal or corporate taxes and no transactions costs nor private information. In this perfect world, LGB and FJB are crypto issuers, Bitcoin competitors, not yet bankrupt like FTX, identical in all respects, except that LGB is unlevered and FJB has $1,000,000 of 10% bonds outstanding. Assume that EBIT is $300,000 for both, and that the cost of equity to LGB is 15% and the cost of equity to FJB is 20%. Next assume valuations of LGB = $2,200,000 and FJB = $2,000,000. Using the M&M propositions, demonstrate how to make a riskless profit from LGB and FJB without investing a penny of one's own wealth and yes, LGB is the famous "Let's Go Brandon"
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Every student loves the Nobel-prize-winning theory of capital structure irrelevance in a world of
perfect competition without taxes or private information (and no transactions costs), formulated by
Modigliani and Miller, or M&M for short. Suppose there are no personal or corporate taxes and no
transactions costs nor private information. In this perfect world, LGB and FJB are crypto issuers, Bitcoin
competitors, not yet bankrupt like FTX, identical in all respects, except that LGB is unlevered and FJB has
$1,000,000 of 10% bonds outstanding. Assume that EBIT is $300,000 for both, and that the cost of
equity to LGB is 15% and the cost of equity to FJB is 20%. Next assume valuations of LGB = $2,200,000
and FJB = $2,000,000. Using the M&M propositions, demonstrate how to make a riskless profit from LGB
and FJB without investing a penny of one's own wealth and yes, LGB is the famous "Let's Go Brandon"
crypto currency whose first LGB coin was issued in 2021.
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