MM: An Interpretation MM results indicate that managers cannot change the value of a firm by repackaging the firm's securities.
{"Image DocumentName": "MM: An InterpretationMM results indicate that managers cannot change the value of a firm by repackaging the firm\u2019s securities.", "Image ImageDescription": "MM argue that the firm\u2019s overall cost of capital cannot be reduced as debt is substituted for equity, even though debt appears to be cheaper than equity. The reason for this is that as the firm adds more debt, the remaining equity becomes risky. As the risk rises, the cost of equity capital rises as a result. The increase in the cost of remaining equity capital offsets the higher proportion of the firm financed with low-cost debt. MM proves that the two effects exactly offset each other, so that both the value of the firm and the firm\u2019s overall cost of capital are invariant to leverage.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}