IRRELEVANCE OF CAPITAL STRUCTURE: THE MODIGLIANI-MILLER HYPOTHESIS WITHOUT TAXES

The Modigliani-Miller (M-M) hypothesis is identical with the net operating income approach. (M-M) argue that, in the absence of taxes, a firm’s market value and the cost of capital remain invariant to the capital structure changes. In their 1958 article, they provide analytically sound and logically consistent behavioural justification in favour of their hypothesis, and reject any other capital structure theory as incorrect.