Analysis Of Modigliani And Miller 's Irrelevance Theory

Better Essays

Capital structure is the mixture of equity and debt finance used by the company to finance its assets. This terms created many issues around the decisions on how to have perfect capital structure for the firm to run well. Modigliani and Miller’s irrelevance theory is the most important and puzzling issues that have strong impact on the modern corporate finance theory and which is challenged the tradition optimal capital structure theory the most. After more than 50th years of existence, M&M is still one of the most controversy theory brought about many debates on the financing behavior of corporate in the business world. That is the reason for financial researchers and analysts consider this theory as a central financial concept for the study the capital structure decision. Along with this theory, the contribution of trade-off theory and pecking order theory to examine the optimal capital structure is contribute by other reaserchers.
Capital structure
Modigliani and Miller’s irrelevance theory
Capital structure refers to the sources of financing, particularly to proportion of debt or leverage/gearing and equity that a business uses to fund it assets, operations and future growth (Jensen and Meckling, 1979). In reality, some company chose to be all-equity financed for their business. Others firms could have low levels of equity and high levels of debt. The debates about capital structure of the capital become extremely controversial since the appearance of M&M theory.

Get Access