Vidyavardhaka

First Grade College – PG Centre

C2 Assignment Presentation
 Modigliani and Miller Approach
Preposition - 2
INTRODUCTION :
The Modigliani and Miller approach to capital
capital theory, devised in 1950’s advocates the
capital structure irrelevancy.
Whether a firm is highly relevant leveraged or has a
lower debt component has no bearing on its market
value. Rather the market value of firm is solely
dependent on the operating profits of the
company. The modiliani Miller Approach states that
the value of the two firms is the same
MM Proposition 2 (with taxes )

Meaning :
The second proposition states the company’s
weighted avarage cost of capital is a function of
the company’s business risk and will remain
constant regardless of the capital structure. It
implies cost of debt and cost of capital with any
change in debt equity ratio resulting in constant
weighted –average cost of capital
Definition:
MM Approach supports the “dividend irrelevance
theory ‘’ stating that the dividends are irrelevant
and has no effect on firm’s share value .
Assumptions (with taxes )
 The theory indicates that, the firms the value of
levered firm ( with debt) and unlevered firm
(without debt) is the same
 corporations are taxed at the rate on earnings
after interset . No transaction costs exist &
individuals and corporations borrow at the same
rate