Formulas in MM Prop I/II

CFA Level II
#1

We don’t need to know them right? LOS says explain…

#2

true; just gotta know what prop 1 and prop 2 are. prop 1: structure doesn’t create wealth, all investors expect the same return (debt and equity alike) prop 2: since debt gets superior claim, they’ll accept less return, so the cost of equity is a linear function of the D/E ratio I’m not spending any time learning more than that.

#3

Thanks…weird cause EOC Q’s have them…

#4

magicskyfairy Wrote: ------------------------------------------------------- > true; just gotta know what prop 1 and prop 2 are. > > prop 1: structure doesn’t create wealth, all > investors expect the same return (debt and equity > alike) > prop 2: since debt gets superior claim, they’ll > accept less return, so the cost of equity is a > linear function of the D/E ratio > > I’m not spending any time learning more than that. This is actually not right at all. Prop I = how leverage affects value of firm Prop II = how leverage affects the WACC

#5

“Prop Joe” is the bad guy in “The Wire”