Miller and Modigliani propositions

Miller and Modigliani's propositions are foundational principles in corporate finance that explore how a company's value is affected by its financial structure. Their first proposition states that, in perfect markets, a firm’s value is unaffected by how it finances itself—whether through debt or equity—since investors can replicate any financing decision. The second proposition introduces the idea that with the presence of taxes, using debt can increase a company's value because interest payments are tax-deductible, making debt a more attractive financing option. Together, these propositions help understand the balance between debt and equity in maximizing a company's value.