When a waitress asked Yogi Berra (Baseball Hall of Fame catcher for the New York Yankees) whether he wanted his pizza cut into four pieces or eight, Yogi replied: "Better make it four. I don't think I can eat eight."a
Yogi's quip helps convey the basic insight of Modigliani and Miller. The firm's choice of leverage "slices" the distribution of future cash flows in a way that is like slicing a pizza. MM recognized that if you fix a company's investment activities, it's like fixing the size of the pizza; no information costs means that everyone sees the same pizza; no taxes means the IRS gets none of the pie; and no "contracting costs" means nothing sticks to the knife.
With a tax rate of about 40 percent, this implies that every dollar of debt adds about 40 cents of value to the firm, and this leads to the conclusion that the optimal capital structure is virtually 100 percent debt. MM also showed that the cost of equity, rs, increases as leverage increases, but that it doesn't increase quite as fast as it would if there were no taxes. As a result, under MM with corporate taxes the WACC falls as debt is added.
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Since World War II, there has been a tremendous change in the makeup and direction of kid baseball, as it is called. Adults, showing an unprecedented interest in the activity, have initiated and developed programs in thousands of towns across the United States programs that providebr wholesome recreation for millions of youngsters and are often a source of pride and joy to the community in which they exist.