ECONOMICS Chapter Notes -Franco Modigliani, Merton Miller, Corporate Finance
9 Dec 2021
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The m&m theorem, or the modigliani-miller theorem, is one of the most important theorems in corporate finance. The theorem was developed by economists franco modigliani and merton miller in 1958. M&m theory is that the capital structure of a company does not affect its overall value. The first version of the m&m theory was full of limitations as it was developed under the assumption of perfectly efficient markets, in which the companies do not pay taxes, while there are no bankruptcy costs or asymmetric information. Subsequently, miller and modigliani developed the second version of their theory by including taxes, bankruptcy costs, and asymmetric information. This is the first version of the m&m theorem with the assumption of perfectly efficient markets. Where: vu = value of the unlevered firm (financing only through equity, vl = value of the levered firm (financing through a mix of debt and equity)
