As you read in this weeks introduction, 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 dont think I can eat eight.

This comment helps to illustrate Modigliani and Millers basic insight. The firms choice of leverage divides future cash flows in a way thats like slicing a pizza. MM recognized that if a companys future investments are fixed, its like fixing the size of the pizza: No information costs means that everyone sees the same pizza; no taxes means that the IRS gets none of the pie; and no contracting costs means that nothing sticks to the knife.

So just as the substance of Yogis meal is unaffected by whether the pizza is sliced into four pieces or eight, the economic substance of the firm is unaffected by whether the liability side of the balance sheet is sliced to include more or less debt under the MM assumptions. Note, though, that whereas the IRS may get none of Yogis pizza, it is very likely to get some of the firms income. Yogis assumptions are more realistic than MMs.

• Read the story above. Now, think about MM assumptions and comment on them: Which make sense? Which doesnt? Is it OK to use so many unrealistic assumptions?