Chapter 17, Problem 24PS

Investor choice People often convey the idea behind MM's proposition l by various supermarket analogies, for example, “The value of a pie should not depend on how it is sliced,” or, “The cost of a whole chicken should equal the cost of assembling one by buying two drumsticks, two wings, two breasts, and so on.”

Actually proposition 1 doesn’t work in the supermarket. You’ll pay less for an uncut whole pie than for a pie assembled from pieces purchased separately. Supermarkets charge more for chickens after they are cut up. Why? What costs or imperfections cause proposition I to fail in the supermarket? Are these costs or imperfections likely to be important for corporations issuing securities on the U.S. or world capital markets? Explain.