The Modigliani-Miller Theorem with Financial Intermediation ()
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.
Share and Cite:
J. McDonald, "The Modigliani-Miller Theorem with Financial Intermediation,"
Modern Economy, Vol. 2 No. 2, 2011, pp. 169-173. doi:
10.4236/me.2011.22022.
Conflicts of Interest
The authors declare no conflicts of interest.
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