Abstract
An essential component of the modern monetary system is the existence of a credit market with a relatively stable market rate of interest. This is based on the interest rate for public loans that, for simplicity, are considered to be risk-free, as the state can, if needed, always borrow money from its own central bank and therefore cannot go bankrupt in terms of its own money. It is therefore presumed that an owner of money will capitalize the money that he does not immediately need for consumption. By capitalizing we mean that he will invest it expecting to receive a return at a market rate at least equivalent to the interest rate for public loans.
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- 1.
The present value, that is, the sum of the geometric progression of an infinitely increasing rent, is only finite if r > cj. This problem is known in the literature. M. H. Miller and F. Modigliani write on this subject: “The essential thing is, of course, that the present value is finite, which may always be assumed in an economic analysis” (Miller and Modigliani 1975, p. 293).
- 2.
There have been many arguments over the relevance or irrelevance of the capital structure, that is, the ratio between external and equity capital, otherwise known as the debt–equity ratio in the literature on financing investments. The proposition of the irrelevance of the debt–equity ratio was put forward by Modigliani and Miller (1955). According to these authors, the irrelevance of the debt–equity ratio only affects the assessment of a firm when the sum of the equity and borrowed capital remains constant. The irrelevance theory is not valid if, as we assume, it is possible to enlarge the amount of the capital as a whole. In this case, the present value of the future profits does increase with an increase in debt financing. Cf. on this subject: Klaus Spremann (1991, 281 ff.).
References
Miller MH, Modigliani F (1975) Dividendenpolitik, Wachstum und die Bewertung von Aktiven. In: Hax H, Laux H (Hrsg) Die Finanzierung der Unternehmung. Köln
Modigliani F, Miller MH (1955) The cost of capital, corporation finance, and the theory of investment. Am Econ Rev 55(3):516–525
Spremann K (1991) Investition und Finanzierung, 4. Auflage. München
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Binswanger, H.C. (2013). The Increase of the Present Value of Profits as the Growth Impetus. In: The Growth Spiral. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-31881-8_10
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DOI: https://doi.org/10.1007/978-3-642-31881-8_10
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