Modigliani-Miller theorem

The Modigliani-Miller theorem (of Franco Modigliani and Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. The theorem is made up of two propositions which also exist in a situation with taxes.

Related Topics:
Franco Modigliani - Merton Miller - Capital structure - Tax - Bankruptcy - Asymmetric information - Efficient market - Dividend

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