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Using Mathematica to Do Cost of Capital Calculations

S. Benninga
Journal / Anthology

Mathematica in Education
Year: 1993
Volume: 2
Issue: 3
Page range: 11-14

An important part of an introductory finance course discusses the derivation of the Modigliani-Miller (MM) capital structure propositions. These propositions explain how the value of a firm changes when the firm's activities are financed with different combinations of equity and debt. They also show how the discount rate applied to the firm's equity cash flow stream is affected by the firm's leverage. A typical textbook reference is [Brealey-Myers, 1991]; see chapters 17-18. In this note I discuss how to derive the MM cost of capital formulas, in a slightly more general model than that usually discussed in standard finance texts. Mathematica greatly aids in doing the algebraic calculations.

*Business and Economics