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Article: Modigliani and Miller live on.(Franco Modigliani)(Merton H. Miller)
- Article from:
- Strategic Finance
- Article date:
- December 1, 2003
- Author:
CopyrightCOPYRIGHT 2003 Institute of Management Accountants. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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STUDYING THE "MM" THEORIES of capital structure and dividend policy has remained de rigueur in most advanced corporate finance courses. MM, of course, stands for Nobel laureates in economics Franco Modigliani and Merton H. Miller, who devised the theorems. Modigliani died recently, on September 25 at age 85. Miller died in 2000.
Let's review the MM Propositions I and II.
MM posited in a 1958 paper that, assuming perfect capital markets and tax neutrality, a firm's mix of debt and equity doesn't affect its value. That's because investors base their valuation of a firm on its profits, not its financing. The weighted average cost of capital bears no ...