My grandfather, Merton Miller, used to always tell a joke about Yogi Berra ordering a pizza. He would order the pizza and they would bring it out to his table where the waiter would then ask him how he would like the pizza sliced, into sixths or into eighths. To which Yogi Berra would say, "cut it into 8ths because I'm feeling hungry."
I wish i saw this video before my finance exam, but i am gonna take it one more this time year so hopefully i can use some of this stuff. Thank you so much sir.
Great video! But what do I miss? I get that the capitalstructure is irrelevant regarding EBIT but it can not be true for ROE - even if you do not consider deductables and taxes?! If you see it from an accounting/reporting perspective where equity is a residual size and (last-ranking in the event of liquidation ) compared to debt, which is always served first. There are always some provision for debt equity but never for equity. Also: Anyone who has ever recognized goodwill in a business transaction, knows that it is significantly influenced by the debt capital acquired. Thanks for a reply :)
Sir in the first restaurant's case did you mean that 1 million is Revenue? Cuz for getting EBIT shouldn't we subtract at least operating expenses or cost of goods produced in our case 500K? ( 1million - 500K= 500K ) ?
In case of ROCE M+M theory does not give significant impact although the ROE has a big impact on the Returns made by the investment. through the choice of investment.
Hey, great video as usual. I have a question: so if there is a profit, debt reduces the taxable income and so the more debt you have the more the taxable income is reduced, and if there is profit the total return on investment of a levered firm will always be greater than a firm with just equity, with the same ebit and the same tax deduction rate. Did I get it right? So, the same ebit for the debt holders and equity holders combined is worth more if the firm is levered.
@@FinAndEcon And what about the ROE? In this case, as long the ROE is greater than the interest of debt for a given debt the shareholders will earn more in respect of the same situation of 100% equity right?
@@asgardro4434 Yes, absolutely. What you have discoverer is known as the leverage effect. Taking on more debt increases the risk of the equity position as the likelihood of bankruptcy increases, but equity holders are rewarded with more return.
aren't most of these models wrong - i'm reading a book by thaler (misbehavior) he didn't have the most flattering comments for miller and his ideas (seem stuck in old school U of C group think). i'm not a finance or econ guy (computer) so i probably have no idea what i'm talking about
You may have heard the saying: All models are wrong, but some are useful. These models try to explain what is going on on financial markets. Because there is so much going on at the same time and these marketsts are so complex, there is no hope of explaining everything. But these famous models capture one of the large channels that move the leverage decision of companies - in that sense they are quite useful in explaining SOME of what is going on.
Yeah…noteworthy several years ago when the IFRS allowed such thing as “operational lease” most of airlines have had much lighter assets and hence higher returns on them and the invested capital…
Debt capital is inevitable but why do they mphasis in such business. May be IT also but no loan sanctioned in the EBIT calculation,thus Miller's insight in this case might be debt to NPV or say equity.
My grandfather, Merton Miller, used to always tell a joke about Yogi Berra ordering a pizza. He would order the pizza and they would bring it out to his table where the waiter would then ask him how he would like the pizza sliced, into sixths or into eighths. To which Yogi Berra would say, "cut it into 8ths because I'm feeling hungry."
No way he is your grandfather :). But that’s a good joke
Really well done! I came here to learn about M&Ms principle and walked away doing just that! Well done sir!
By far one of the best explanations on RUclips I could find. You should consider teacher this to university students.
I wish i saw this video before my finance exam, but i am gonna take it one more this time year so hopefully i can use some of this stuff. Thank you so much sir.
Thank u so much, u have managed to turn a very difficult concept into an easy one for beginners
Extremely Informative and great Presentation. I got yourself a new Subscriber! Thanks!
Excellent video, keep on doing videos like this.
Really good explanation. Thank you.
Thank you bro! Good video
Excellent
Great video! But what do I miss?
I get that the capitalstructure is irrelevant regarding EBIT but it can not be true for ROE - even if you do not consider deductables and taxes?!
If you see it from an accounting/reporting perspective where equity is a residual size and (last-ranking in the event of liquidation ) compared to debt, which is always served first. There are always some provision for debt equity but never for equity.
Also: Anyone who has ever recognized goodwill in a business transaction, knows that it is significantly influenced by the debt capital acquired.
Thanks for a reply :)
As the share price fluctuates in short term or long term basis hence,the MM had thought the debt is high thus equity should be proportionate.
As the ratio and based on intrinsic value the structuring this Modigliani Miller showing some calculation as the so many cycles are in generated EBIT.
Sir in the first restaurant's case did you mean that 1 million is Revenue? Cuz for getting EBIT shouldn't we subtract at least operating expenses or cost of goods produced in our case 500K? ( 1million - 500K= 500K ) ?
EBIT may be negative or the small in size but we always think well off.
In case of ROCE M+M theory does not give significant impact although the ROE has a big impact on the Returns made by the investment. through the choice of investment.
Hey, great video as usual.
I have a question: so if there is a profit, debt reduces the taxable income and so the more debt you have the more the taxable income is reduced, and if there is profit the total return on investment of a levered firm will always be greater than a firm with just equity, with the same ebit and the same tax deduction rate. Did I get it right? So, the same ebit for the debt holders and equity holders combined is worth more if the firm is levered.
Yes that is exactly it.
@@FinAndEcon And what about the ROE? In this case, as long the ROE is greater than the interest of debt for a given debt the shareholders will earn more in respect of the same situation of 100% equity right?
@@asgardro4434 Yes, absolutely. What you have discoverer is known as the leverage effect. Taking on more debt increases the risk of the equity position as the likelihood of bankruptcy increases, but equity holders are rewarded with more return.
@@FinAndEcon Thanks a lot, you are a great teacher. And I mean it!
Thanks
THANK U SLAY
aren't most of these models wrong - i'm reading a book by thaler (misbehavior) he didn't have the most flattering comments for miller and his ideas (seem stuck in old school U of C group think). i'm not a finance or econ guy (computer) so i probably have no idea what i'm talking about
You may have heard the saying: All models are wrong, but some are useful. These models try to explain what is going on on financial markets. Because there is so much going on at the same time and these marketsts are so complex, there is no hope of explaining everything. But these famous models capture one of the large channels that move the leverage decision of companies - in that sense they are quite useful in explaining SOME of what is going on.
Airline companies have more debt because most of their crafts are leased which is equal to a loan...i.e. debt capital
That is true. But remember that it is a conscious decision of airlines to lease - they would not have to!
Yeah…noteworthy several years ago when the IFRS allowed such thing as “operational lease” most of airlines have had much lighter assets and hence higher returns on them and the invested capital…
True
Debt capital is inevitable but why do they mphasis in such business.
May be IT also but no loan sanctioned in the EBIT calculation,thus Miller's insight in this case might be debt to NPV or say equity.