Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations

APPENDIX F

The Modigliani-Miller Theorems

UP TO THE MIDDLE of the 1950s, the literature of corporate finance consisted mainly of descriptions of methods and institutions.¹ Theoretical analysis was rare. It was not until Franco Modigliani and Merton Miller, in 1958, presented their now-famous theorem, and at about the same time James Tobin (Nobel Prize 1981) and others started to develop the theory of portfolio selection, that a scientific theory emerged concerning the connection between financial market characteristics and the financing of investments, debts, taxes, etc. Once established, this theory developed very rapidly.

The first Modigliani-Miller theorem concerns the question of how the market value of a firm is affected by the volume and ...