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 1950s.
What are assumptions of MM theory of capital structure?
The assumption implies that companies operating in the world of perfectly efficient markets do not pay any taxes, the trading of securities is executed without any transaction costs, bankruptcy is possible, but there are no bankruptcy costs, and information is perfectly symmetrical.
What is MM hypothesis approach?
The Modigliani and Miller approach to capital theory, devised in the 1950s, advocates the capital structure irrelevancy theory. This suggests that the valuation of a firm is irrelevant to the capital structure of a company.
What are the 3 approaches in determining capital structure?
Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.