Capital Ideas — Chapter 9: The Bombshell Assertions

1. 1. Modigliani and Miller argued that the market value of any firm is independent of its capital structure.
2. 2. MM used arbitrage and the Law of One Price to prove that capital structure irrelevance must hold in perfect markets.
3. 3. MM's dividend irrelevance proposition states that the value of the corporation is the same whether it pays a big dividend, a small dividend, or no dividend at all.
4. 4. When taxes are introduced, debt financing becomes advantageous because interest payments are tax-deductible, increasing the value of the firm.
5. 5. Miller argued that increased corporate leverage does not increase total risk for the economy; it merely repartitions risk among security holders.
6. 6. MM theory was initially met with hostility, including a critical review by David Durand, but the controversy helped establish its prominence.
7. 7. Despite taxes, transaction costs, and other real-world complications, MM's core insight that capital structure is largely irrelevant remains robust.