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 ME  Vol.2 No.2 , May 2011
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.
Cite this paper: nullJ. McDonald, "The Modigliani-Miller Theorem with Financial Intermediation," Modern Economy, Vol. 2 No. 2, 2011, pp. 169-173. doi: 10.4236/me.2011.22022.
References

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[5]   M. Goodfriend and B. McCallum, “Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration,” Journal of Monetary Economics, Vol. 54, No. 5, July 2007, pp. 1480-1507. doi:10.1016/j.jmoneco.2007.06.009

[6]   J. Stiglitz, “A Re-examination of the Modigliani-Miller Theorem,” The American Economic Review, Vol. 59, No. 5, December 1969, pp. 784-793.

[7]   T. Sargent, “Macroeconomic Theory,” 2nd Edition, Academic Press, Orlando, 1987.

 
 
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