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Think of the firm as a gigantic tub of whole milk. The farmer can sell the whole milk as it is. Or he can separate out the cream, and sell it at a considerably higher price than the whole milk would bring. But, of course, what the farmer would have left would be skim milk, with low butter-fat content, and that would sell for much less than whole milk. The Modigliani-Miller proposition says that if there were no cost of separation , the cream plus the skim milk would bring the same price as the whole milk. (en) |
