Default Risk, Scale, and the Homemade Leverage Theorem.

This article discusses the assumptions and theorems of the homemade leverage of Modigliani-Miller regarding the issuance of bonds and shares by corporations and the default risk on bonds in the U.S. The issuance of unlimited quantities of bonds and shares by the corporations will not have a default risk on bonds. Moreover, the limitation on the corporation financial theory is given and independent capital market considerations. However the theorems states that the corporate rate of return per dollar invested is independent of the amount invested and with nonnegative restrictions on debt and shares and homemade leverage theorem fails when investor prefer an increase or decrease in the corporate debt-ratio. Furthermore, the unrationed margin purchaser of a corporation's share, an investor will prefer an increase (decrease) in the corporate debt-equity ratio.