MM I(taxes) - value maximimized at 100% debt MM II(taxes) - WACC minimized at 100% debt. Aren’t these both the same?
The way I see these MM propositions is that you need to look at these separately. They both refer to the same thing if you take the proposition away and add taxes - the capital structure of a company. based on the static trade-off theory there is a specific capital structure that should be used, but when you eliminate taxes and hold certain ideas then there is no longer that specific cap structure to use. MM1 holds the idea that you cannot add value to a company by changing the cap structure. ie. cap structure has no bearing on mkt value. MM2 holds that you cannot change WACC by changing the cap structure. ie cap tructure has no bearing on WACC just because they both result in the same conclusion (using 100% debt) does not mean they are the same - they come to that conclusion using different assumptions. This is just how I look at these.
I think so, they are connected, One cannot exist without the other.
Thanks . Got it