Modigliani And Miller's Theory Of Cost Theory

1167 Words5 Pages
Irrelevant and relevant theory
Modigliani and Miller (1958) illustrate that under certain key Assumption, firm’s value is unaffected by its capital structure. capital market is assume to be perfect in Modigliani and Miller theory, where insider and outsider have free access to information which is no transaction cost, bankruptcy cost and no taxation. Equity and debt choice become irrelevant and internal and external fund can be perfectly substituted. The M&M theory (1958) argues that the value of the firm should be depend on its capital structure. They also argue further that the firm should have the same market value and the same weighted Average Cost of capital at all capital structure level because the value of the company should depend on the return and on the company’s risk of its operation. Miller brought forward the next version of the irrelevance theory of capital structure. He appealed that capital structure decision of firm with both corporate and personal taxes circumstance is irrelevant. This theory was criticize on the ground that perfect market does not existing in real life. The three well-known theory is suggested by the previous researcher which is trade off theory, Pecking order theory and Agency Cost Theory.
Trade off theory (1976), explain that capital structure allows of bankruptcy cost to exist as an offset to the benefit of the using debt as tax shield. Trade off by Miller (1977) refer to the thought cost on how much debt and equity use by considering

More about Modigliani And Miller's Theory Of Cost Theory

Open Document