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 are the 4 theories of capital structure?
Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.
What is capital structure theory explain?
The traditional theory of capital structure says that a firm's value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease if there is too much borrowing. This decrease in value after the debt tipping point happens because of overleveraging.
How do taxes affect the Modigliani and Miller theory of capital structure?
Modigliani and Miller (MM) Their main conclusions can be summarized as: In the absence of taxes, firm capital structure is irrelevant. With taxes, a firm's cost of capital can be lowered through issuing debt. This highlights the importance of debt as a tax shield.