Modigliani-Miller Theorem

Overview

What if the value of a company had nothing to do with how it’s financed? The Modigliani-Miller Theorem suggests just that, under certain conditions.

Key Components

This framework helps us understand how capital structure affects firm value, assuming no taxes, no bankruptcy costs, and perfect markets. Visualizing it, we see two sides: one representing the value of leveraged and unleveraged firms, showing they’re equal in a frictionless world.

How to Apply

In practice, this theorem guides decisions on debt versus equity, but real-world factors often complicate things. It’s a cornerstone in corporate finance, offering a clear lens to analyze capital structure choices.

Key Insight