Modigliani–Miller theorem

E483085

capital structure irrelevance proposition theorem in corporate finance

The Modigliani–Miller theorem is a foundational result in corporate finance stating that, under certain idealized conditions, a firm's value is unaffected by its capital structure or how it is financed.

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All labels observed (2)

Label	Occurrences
Modigliani–Miller theorem canonical	2
Modigliani–Miller capital structure irrelevance proposition	1

Statements (47)

Predicate	Object
instanceOf	capital structure irrelevance proposition ⓘ theorem in corporate finance ⓘ
alsoKnownAs	MM theorem NERFINISHED ⓘ capital structure irrelevance theorem NERFINISHED ⓘ
assumption	individuals and firms can borrow and lend at the same risk-free rate ⓘ investment policy is fixed and independent of financing ⓘ no agency costs ⓘ no bankruptcy costs ⓘ no taxes ⓘ no transaction costs ⓘ perfect capital markets ⓘ symmetric information ⓘ
contributedTo	development of modern capital structure theory ⓘ
coreClaim	a firm’s total value depends on the cash flows generated by its assets, not on how those assets are financed ⓘ the value of a firm is independent of its capital structure under certain assumptions ⓘ
countryOfOrigin	United States of America ⓘ surface form: United States
extendedBy	Modigliani–Miller theorem with corporate taxes NERFINISHED ⓘ Modigliani–Miller theorem with personal taxes NERFINISHED ⓘ
field	corporate finance ⓘ financial economics ⓘ
hasLimitation	does not fully apply in the presence of asymmetric information ⓘ does not hold exactly when taxes, bankruptcy costs, or agency costs are significant ⓘ
hasProposition	Proposition I NERFINISHED ⓘ Proposition II NERFINISHED ⓘ
historicalSignificance	considered a foundational result in modern corporate finance ⓘ
implies	any change in capital structure is offset by a change in the cost of equity so that firm value is unchanged ⓘ weighted average cost of capital is constant with respect to leverage under its assumptions ⓘ
influenced	agency theory of capital structure ⓘ pecking order theory of capital structure ⓘ trade-off theory of capital structure ⓘ
methodology	arbitrage argument between levered and unlevered firms ⓘ
namedAfter	Franco Modigliani NERFINISHED ⓘ Merton H. Miller NERFINISHED ⓘ
Proposition I	firm value is independent of leverage in a world without taxes ⓘ
Proposition II	cost of equity increases linearly with leverage due to higher financial risk ⓘ
publicationYear	1958 ⓘ
publishedIn	The American Economic Review NERFINISHED ⓘ
relatesToConcept	arbitrage ⓘ capital structure ⓘ cost of debt ⓘ cost of equity ⓘ firm value ⓘ leverage ⓘ weighted average cost of capital ⓘ
usedIn	analysis of optimal capital structure ⓘ corporate finance teaching ⓘ valuation of levered and unlevered firms ⓘ

Referenced by (3)

Full triples — surface form annotated when it differs from this entity's canonical label.

Franco Modigliani → notableWork → Modigliani–Miller theorem ⓘ

Franco Modigliani → notableIdea → Modigliani–Miller theorem ⓘ

this entity surface form: Modigliani–Miller capital structure irrelevance proposition

Fisher separation theorem → relatedTo → Modigliani–Miller theorem ⓘ