Management Notes

Reference Notes for Management

MM Irrelevance proposition – Modigliani and Miller Approach | Capital Structure Theories

MM Irrelevance proposition

MM Irrelevance proposition

The relationship between leverage and the cost of debt capital was discussed for the first time by Franco Modigliani and Merton Miller in 1958. In the absence of taxes, Modigliani and Miller (MM) argue that a firm’s market value and the cost of capital remain unchanged. Based on MM’s analysis, a firm’s market value is determined by capitalizing its expected return at an appropriate capitalization rate regardless of its capital structure.

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