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Comment by dragontamer | Hacker News Reader

A lot of companies have a lot of bonds out. Its not necessarily unhealthy to keep some debt around, especially through the 2013 through 2017 timeframe when interest rates were abnormally low.

Elon will have to roll over the debt somehow: either into stock offerings or maybe into new bonds. The meager profits reported this quarter aren't anywhere near the amount they need to pay off those debts... even if the profits grow 2x or 3x larger in Q4 and Q1-2019.

But, paying off some of those debts will put the company into a stronger position.

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>Its not necessarily unhealthy to keep some debt around, especially through the 2013 through 2017 timeframe when interest rates were abnormally low.

The Tesla bonds in question have a coupon of 5.3% and were sold into one of the lowest interest rate environments in history. They currently have an 8.5% yield. Rolling debt over on those terms is not fun.

According to financial theory, how you structure a company has no correlation with its success. Therefore the kind of debt financing that Elon is using is just fine.

Financial theory and reality tend to agree except in a crisis. Unfortunately crises do tend to come along periodically. How TSLA weathers the next one will be interesting to see.

The Modigliani-Miller 'theorem' is dangerous nonsense. It proves a fact about a model rather than a fact about the real world.

From Wikipedia "The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed". See anything wrong with this picture?

I agree with you that the grandparent misinterpreted the theorem as the Wikipedia article includes something similar to your reply:

"These results might seem irrelevant (after all, none of the conditions are met in the real world), but the theorem is still taught and studied because it tells something very important. That is, capital structure matters precisely because one or more of these assumptions is violated."

[0] https://en.wikipedia.org/wiki/Modigliani–Miller_theorem

But it's already painfully obvious that one or more of the assumptions is violated. That should only be surprising if you've spent years being indoctrinated by academic finance or economics.

What this isn't true. The theory says some debt is optimal due to taxes. However I am rusty on these courses.

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