Risk Class Completion of the Modigliani and Miller Model – A New Framework for Discounted Cash Flow

In this paper Modigliani and Miller's risk class including only one type of firm to date, namely a non-net investing firm, is supplemented by a second type of firm, namely a net investing firm. One main result of the paper is the derivation of the Gordon and Shapiro growth formula within the uncertainty framework of Modigliani and Miller (1958, 1963). The discounting procedure leading to the growth formula is non-trivial. Since innumerable investment policies are conceivable besides the Gordon and Shapiro policy, this paper is only to by regarded as a first step towards (risk class) completion of the original Modigliani and Miller model. By doing so, the model becomes a challenger of current DCF theory