The Modigliani & Miller (M&M) model is one of the most important theoretical models in finance, as it provides a framework for analyzing the relationship between a company’s capital structure and its market value.
The fundamental concept of the model is to determine whether there is an optimal way to allocate financing sources between debt and equity to increase firm value.
The model relies on specific assumptions such as:
- No taxes or only minimal taxes,
- Efficient financial markets,
- Absence of bankruptcy costs,
- Full availability of information to all investors.
The theoretical results of the model vary depending on the presence or absence of taxes, and it distinguishes between the effect of leverage on firm value and the cost of equity.
- Teacher: Nadia Zouggaret