This week’s readings in the textbook concern the capital structure decisions of firms–i.e., should a firm use debt or equity to finance its operations. The textbook describes the MM Propositions on the effect of debt on the value of the firm.
This discussion question takes a much broader view of the use of debt in our economy. Today, the use of debt is a given by all participants in our economy–governments, businesses, and consumers. Read the article “Repent at leisure” from The Economist. The article describes debt for various groups in the economy and across a variety of countries. Part of the article includes an interactive graph that visually examines debt levels around the world for various sectors of the economy.
Please read the article and ‘play’ with the interactive graph. Respond to the following questions:
Describe and discuss the main points in the article–i.e., what did you learn from it?
How have debt levels for various segments of society changed over time? What have been the benefits of this increased debt? What are the negative effects of it?
How would you relate the information in the article to the propositions proposed by MM?