B. Modigliani And Millers Theories (MM Theory)
B
Modigliani and Millers theories (MM theory)
The theory is that, without considering the corporate income tax and business risk while only the same capital structure is not the same, independent of the company's capital structure and the company's market value. Or, when the company's debt ratio from zero to 100%, of the total capital cost of business and any change in the total value does not happen, that corporate value and liabilities unrelated to whether a company, there is no optimal capital structure. MM theory amended (the capital structure theory under the tax conditions), is MM in 1963 jointly published another article about the capital structure of the paper the basic idea. They found that, in consideration of the corporate income tax case, since the interest on debt is tax-free spending; can reduce the overall cost of capital, increasing the value of the business. Therefore, the company simply by increasing financial leverage, and continue to reduce its cost of capital, more debt, more significant leverage, the greater the value of the company. When debt approaching 100% of the capital in the capital structure, the capital structure is the best at this time to maximize enterprise value.
MMI
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No tax MM model ignores the reality of the tax factor. Because of the corporate income tax, interest paid to creditors as business income deductions, and the dividend paid to shareholders in after-tax profits. This leads to different effects liabilities and shareholders’ value of the
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