MAKERERE UNIVERSITY CORPORATE FINANCE MBA 2 – GROUP COURSEWORK QUESTION People often convey the idea behind Modigiliani amp; Millers’s proposition 1…

MAKERERE UNIVERSITY

CORPORATE FINANCE

MBA 2 – GROUP COURSEWORK

QUESTION

People often convey the idea behind Modigiliani & Millers’s proposition 1 by various supermarkets analogies, for example, “The value of a pie should not depend on how it is sliced,” or, “The cost of a whole chicken should equal the cost of assembling one by buying two drumsticks, two wings, two breasts, and so on,”

Actually proposition 1 doesn’t work in the supermarket. You’ll pay less for an uncut whole pie than for a pie assembled from pieces purchased separately. Supermarkets charge more for chickens after they are cut up. Why? What costs or imperfections cause proposition 1 to fail in the supermarket? Are these costs or imperfections likely to be important for corporations issuing securities on the capital markets? Explain