Author(s)

John F. McDonald

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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.

Modigliani-Miller Theorem, Financial Intermediation, Valuation

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.