Modigliani And Miller 's Capital Structure Theories

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Modigliani and Miller 's Capital Structure Theories
The Modigliani-Miller theorem is the basis for modern thinking on capital structure. The basic theorem that, under certain market process (the classical random walk), in the absence of taxes, bankruptcy costs and asymmetric information, i.e., in an efficient market, the value of a company is not affected by the way the company is financed. No matter whether the capital of the company is obtained with the issue of shares or debt. No matter what the dividend policy of the company. Therefore, the Modigliani-Miller theorem is also often called The Principle of irrelevance of capital structure. It is the emergence of corporate taxes that undo the irrelevance in the structure of financing and the cost of debt is reduced because it is a paid before income tax expense.
Modigliani was awarded the Nobel Prize in Economics in 1985 for this and other contributions.
Miller was a professor at the University of Chicago when he was awarded the Nobel Prize in Economics in 1990, along with Harry Markowitz and William Sharpe, for his work on the "theory of financial economics" with Miller specifically cited for his fundamental contributions the "theory of corporate finance".

Modigliani and Miller theorem UNTAXED
The theorem was originally proved under the assumption of no taxes. It consists of two propositions, which can also be extended to a tax situation.
Consider two firms that are identical except for their financial structures. The
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