Knowledge that Transforms

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Everyone seems to agree that there are significant interactions between corporate financing and investment decisions. The most important argument to the contrary — embodied in Modigliani and Miller's (MM's) famous Proposition I — specifically assumes the absence of corporate income taxes; but their argument implies an interaction when such taxes are recognized. Interactions may also stem from transaction costs or other market imperfections. The purpose of this paper is to present a general approach for analysis of the interactions of corporate financing and investment de-cisions, and to derive some of the approach's implications. Perhaps the most interesting implication is that the weighted average cost of capital formulas proposed by MM and other authors are not always correct. Except in certain special cases, a more general "Adjusted Present Value " rule should, in principle, be used to evaluate investment opportunities. The paper is organized as follows. Section II presents the

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The Fourth Annual Meeting of the Financial Management Association will be held on October [24][25][26] 1974, at the Sheraton-Harbor Island Hotel in San Diego, California. The organization's goal is the advancement of knowledge in the area of the financial administration of business, governmental, and nonprofit entities; it emphasizes an interchange between the academic and the practitioner in seeking that goal. The 1974 Annual Meeting has scheduled approximately 40 sessions devoted to a variety of finance topics, including corporation finance, the management of banks and other financial institutions, real estate finance, financial management of health care organizations, consumer finance, and the securities markets.

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