The Modigliani-Miller (M-M) theorem is an academic proposition that lies at the heart of a lot of the mainstream models used in finance today. It says that the way a firm finances itself is irrelevant to its market value, so firms shouldn’t spend large amounts of time worrying about the mix of debt and equity they have on their balance sheet.
The M-M theorem is built on explicit assumptions that do not always hold true in the real world. It is therefore a good way of addressing choices of capital structure in firms, but it does not offer you a simple answer.
When to use it
- To introduce a discussion on optimal capital structure, especially to managers without a background in finance.
- To support or reject plans ...