Who is modigliani and miller

The risk of incurring these costs, say critics, is a significant factor in financing decisions. The risk of bankruptcy also explains why companies with a lot of intangible assets and growth opportunities tend not to use debt. There's not a lot left at the end. Relevance Retained. In a slow-growth business like printing, one might expect a conservative balance sheet. But what about a fast-growing company? How about high-tech businesses? Same story. Daniher, 36, remembers studying the propositions in business school.

Such beliefs were echoed in a study done by J. Pinegar asked the Fortune CFOs to rank the most important variables that influenced their capital-structure decisions. Which is music to the ears of one Merton Miller. Modigliani and Miller were able to say the surprising things they did about debt and equity because they took the corporate balance sheet out of the hurly-burly of the marketplace and brought it into the economist's laboratory.

In this somewhat sterile setting--where there were no taxes or transaction costs, such as bankers' and lawyers' fees, and where managers didn't behave differently under different balance- sheet scenarios--things looked a little bit different. Proposition I. The value of a company is dictated first by the earning power and riskiness of its assets, not by how those assets are financed. In their paper, the authors gave the following analogy: No matter how hard he tries, a dairy farmer can't increase the value of his milk by selling the cream on the top separately from the milk on the bottom.

What he gains in price when selling the cream, he'll lose in price when selling the milk. Proposition II. The cost of equity capital is an increasing function of leverage. That means you can't lower your total cost of capital by issuing "cheaper" debt.

Your current browser may not support copying via this button. Subscriber sign in You could not be signed in, please check and try again. Username Please enter your Username. Password Please enter your Password. Forgot password? Don't have an account? By clicking sign up, you agree to receive emails from Divestopedia and agree to our Terms of Use and Privacy Policy. The Modigliani-Miller theorem states that the valuation of a firm is not affected by the capital structure of a company in a market without taxes, government and agency fees, and asymmetric information.

Therefore , the theorem is also known as the capital structure irrelevance principle as it is irrelevant whether a firm is highly leveraged or carries low debt because the market value of a firm will be determined by the profits generated by its assets. The Modigliani-Miller theorem forms the basis of modern day thought in the corporate financial structure in which a firm can replicate or undo its financial actions and maintain market value based on the profit generated by its assets.

Lastly, the theorem explores the idea of "even footed-ness" among firms, which questions the types of friction, such as transaction costs and legal constraints, that would allow some firms to have access to different market opportunities or information. This idea has been used to aid in global economics research in order to resolve economic problems, such as monetary and international economics and public finance. Stay on top of new content from Divestopedia. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.

By: Dave Kauppi. By: Jeffrey Kadlic. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance.

Your Practice. Popular Courses. Fundamental Analysis Tools for Fundamental Analysis. Key Takeaways The Modigliani-Miller theorem states that a company's capital structure is not a factor in its value. Market value is determined by the present value of future earnings, the theorem states. The theorem has been highly influential since it was introduced in the s.

Article Sources.