Modigliani-Miller theorem
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The Modigliani-Miller theorem is a foundational concept in corporate finance, developed by economists Franco Modigliani and Merton H. Miller. The theorem posits that a company's market value is primarily determined by its future earning potential, rather than its capital structure (i.e., the mix of debt and equity it uses).12
In essence, the theorem suggests that, under ideal conditions with no taxes or bankruptcy costs, how a company finances its operations is less important than the profitability of those operations. This work revolutionized financial theory by demonstrating that a firm's value is independent of its financing decisions. Modigliani also developed the life-cycle theory of savings, explaining how individuals save for retirement.21
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- Merton H. Miller
The Modigliani-Miller theorem explains the relationship between a company’s capital asset structure and dividend policy and its market value and cost of capital; the theorem demonstrates that how a manufacturing company funds its activities is less important than the profitability of those activities.
Read MoreThe Modigliani-Miller theorem explains the relationship between a company’s capital asset structure and dividend policy and its market value and cost of capital; the theorem demonstrates that how a manufacturing company funds its activities is less important than the profitability of those activities.
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Franco ModiglianiThey found, in the so-called Modigliani-Miller theorem, that the market value of a company depends primarily on investors’ expectations of what the company will earn in the future; the company’s debt-to-equity ratio is of lesser importance. This dictum gained general acceptance by the 1970s, and the technique Modigliani invented for…
Read MoreThey found, in the so-called Modigliani-Miller theorem, that the market value of a company depends primarily on investors’ expectations of what the company will earn in the future; the company’s debt-to-equity ratio is of lesser importance. This dictum gained general acceptance by the 1970s, and the technique Modigliani invented for…
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