Miller and Modiliagni were two great economists that contributed in a big way in the finance field, both winning Nobel prizes in their day.
Today, the MM proposition 1 that states that under the following assumptions the capital structure is irrelevant to the value of the firm is a framework used by CFOs and companies around the world.
The assumptions under this framework are as follows and can in turn be relaxed to evaluate specific corporate situations and decisions:
1. Perfect and Complete Capital Markets
2. NO Taxes
3. Bankruptcy is NOT costly
4. Capital Structure does NOT affect investment policy and cash flows
5. Symmetric Information (no one has an informational advantage)
Their second proposition is also very powerful and states that the cost of equity increases linearly with the market-value based D/E ration
Today, the MM proposition 1 that states that under the following assumptions the capital structure is irrelevant to the value of the firm is a framework used by CFOs and companies around the world.
The assumptions under this framework are as follows and can in turn be relaxed to evaluate specific corporate situations and decisions:
1. Perfect and Complete Capital Markets
2. NO Taxes
3. Bankruptcy is NOT costly
4. Capital Structure does NOT affect investment policy and cash flows
5. Symmetric Information (no one has an informational advantage)
Their second proposition is also very powerful and states that the cost of equity increases linearly with the market-value based D/E ration
