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 1at its most basic level the theorem argues that with certain assumptions in place it is irrelevant whether a company finances its growth by borrowing by issuing stock shares or by reinvesting its profits developed in the 1950s the theory has had a significant impact on corporate finance 1understanding the modigliani miller theoremcompanies have only three ways to raise money to finance their operations and fuel their growth and expansion they can borrow money by issuing bonds or obtaining loans they can re invest their profits in their operations or they can issue new stock shares to investors investopedia candra huffthe modigliani miller theorem argues that the option or combination of options that a company chooses has no effect on its real market value merton miller one of the two originators of the theorem explains the concept behind the theory with an analogy in his book financial innovations and market volatility think of the firm as a gigantic tub of whole milk the farmer can sell the whole milk as is or he can separate out the cream and sell it at a considerably higher price than the whole milk would bring that s the analog of a firm selling low yield and hence high priced debt securities but of course what the farmer would have left would be skim milk with low butterfat content and that would sell for much less than whole milk that corresponds to the levered equity the m and m proposition says that if there were no costs of separation and of course no government dairy support programs the cream plus the skim milk would bring the same price as the whole milk merton miller and franco modigliani conceptualized and developed this theorem and published it in an article the cost of capital corporation finance and the theory of investment which appeared in the american economic review in the late 1950s 2at the time both modigliani and miller were professors at the graduate school of industrial administration at carnegie mellon university both were required to teach corporate finance to business students but unhappily neither had any experience in corporate finance after reading the course materials that they were to use the two professors found the information inconsistent and the concepts flawed so they worked together to correct them 3the result was the groundbreaking article published in the economic journal the information was eventually compiled and organized to become the m m theorem early on the two economists realized that their initial theorem left out a number of relevant factors it left out such matters as taxes and financing costs effectively arguing its point in the vacuum of a perfectly efficient market later versions of their theorem addressed these issues including corporate income taxes and the cost of capital a correction published in the 1960s 4