Discuss the principles presented by Modigliani and Miller and explain your agreement or disagreement.

Modigliani and Miller, part 9

Modigliani (1958) and Miller (1958), proposed the Modigliani–Miller theorem. This theorem states that in perfect markets without taxes, bankruptcy costs or asymmetric data, the firm’s value is not affected by the capital structure of its financing decisions. As this principle implies, firms should have freedom in choosing the type of finance structure they want while still getting optimal outcomes. This allows firms to leverage their resources when investing, which can have some positive effects such as higher returns on equity. Modigliani and Miller’s theorem states that equity funding will not be different from debt financing. This allows firms to choose what is best for them, without having to worry about the higher cost of one type.

However, I disagree with certain aspects of the theory. For example, it assumes perfect markets but ignores risk aversion by investors and transaction costs. All of these factors would impact any financial decision made in the future. You should also remember that every country has different rules and laws regarding borrowing money. Different regulations must be considered when planning corporate finance strategies. Therefore although I believe Modigliani-Miller provides useful guidance regarding finance related issues in certain situations ,there remain several other variables both external and internal which need to be accounted for order make sure company’s finances are managed responsibly.

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