Modigliani-Miller theorem

The Modigliani-Miller Theorem is a fundamental principle in finance that suggests a company's value is unaffected by how it is financed—whether through debt or equity—under certain ideal conditions. In other words, the capital structure (debt vs. equity) does not influence the overall worth of a company. This idea implies that investors can create their own desired exposure to risk and return independent of how the company chooses to fund itself. However, real-world factors like taxes, bankruptcy costs, and informational asymmetries can affect this theoretical view.