## What does the Modigliani-Miller theorem say?

What Is the Modigliani-Miller Theorem (M&M)? The Modigliani-Miller theorem (M&M) states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure.

## Which theory is pronounced by Modigliani Merton H Miller?

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. The main idea of the M&M theory is that the capital structure.

**What is the formula of MM approach?**

The expected return on equity of Firm A can be calculated based on the following formula: RE Firm A = RE Firm B + D/E *(RE Firm B – RD). Firm A is a levered firm and Firm B is an unlevered firm.

**What is the major assumption of pure MM theory?**

The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the enterprise value of a firm is unaffected by how that firm is financed.

### What is MM proposition I and II without taxes?

MM Proposition I (without taxes): The market value of the company is not affected by the capital structure of the company. VL = VU. MM Proposition II (without taxes): The cost of equity is a linear function of the company’s debt/equity ratio.

### What are the assumptions and arguments used by Modigliani and Miller in support of the irrelevance of dividends?

The Theory Modigliani and Miller suggested that in a perfect world with no taxes or bankruptcy cost, the dividend policy is irrelevant. They proposed that the dividend policy of a company has no effect on the stock price of a company or the company’s capital structure.

**What do you mean by MM approach of capital structure?**

What is the MM theory of capital structure? The MM theory of capital structure suggests that the capital structure of a business is irrelevant to the valuation of the firm. High or low debt in the financing mix doesn’t affect the value of the firm. It states that operating income affects the market value of the firm.

**Which of the following is not an assumption in the Miller and Modigliani approach?**

All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment.

#### What is the difference between M&M Proposition 1 and 2?

Proposition I states that the market value of any firm is independent of the amount of debt or equity in capital structure. Proposition II states that the cost of equity is directly related and incremental to the percentage of debt in capital structure.

#### What are the assumptions of Modigliani and Miller?

Modigliani and Miller Assumptions For a small firm, the alternatives may be limited to shareholder equity, bank debt and money owed to suppliers. In the case of a large conglomerate, options may include short- and long-term bonds, preferred stock and loans in various different currencies.

**What is the conclusion of Modigliani and Miller on the relevance of dividend policy?**

Modigliani and Miller suggested that in a perfect world with no taxes or bankruptcy cost, the dividend policy is irrelevant. They proposed that the dividend policy of a company has no effect on the stock price of a company or the company’s capital structure.