Wednesday, December 03, 2008

We need to teach MM better

I was listening this morning to a Morgan Stanley investment banker say that in the early part of the decade, companies' stock prices got hammered if they didn't have enough leverage. Now they get hammered if they don't have sufficient cash to pay off any potential bullet loans.

We try to teach that financing should be irrelevant to business valuation (until the cost of financial distress comes into play). We try to teach that as one takes on more debt, the cost of equity should go up just enough to offset the benefit of debt's lower cost. We just must not teach it sufficiently well.


Anonymous said...

There was an excellent post on Econ. View regarding quants and financial engineers, their education and work experience. Huge disconnect between what they probably should be learning and what they are asked to do on a daily basis.

On a cheerier note, however, Dudamel has arrived and tomorrow night we're going to listen to him conducting one piece completely foreign to our ears, then Mozart Piano Concerto 23 (great backstory on this piece here:

Finally a hike through the alps with a grandiose Strauss.

I hope you caught the comment many posts ago in response to the magical sound in the Amsterdam concert hall. They seem to be very aware of the special relationship between the musicians and the hall.

Anonymous said...

Prof. Green,

This post, especially the comments, and most specifically the commenter who talks about their "real world education" might be of interest to b school students and economists.

From what I understand, their are very intelligent and ethical people graduating that have no idea how things work in the real world. Might as well teach it so that they don't get a shock later on.

Anonymous said...

Financing irrelevant during a period when short term business loans can't be rolled over?

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