Also known as the capital structure irrelevance principle.
Capital structure irrelevance principle - The Modigliani-Miller approach suggests that a company's capital structure does not affect its overall value in a perfect market.
Operating cash flows - The value of a company is determined by its operating cash flows, which are not affected by its capital structure.
Perfect market assumption - The Modigliani-Miller approach is based on the assumption of a perfect market, where there are no taxes, transaction costs or information asymmetry.
Cost of capital - In a perfect market, the cost of capital is the same for all companies, regardless of their capital structure.
Cost of equity - Investors demand a higher rate of return for taking on more risk, which is reflected in the cost of equity.
Financial leverage - Using debt to finance operations does not provide any advantage in a perfect market.
Tax shield - The benefit of the tax shield from interest payments is offset by the increased risk associated with using debt.
Real-world factors - In the real world, factors like taxes, transaction costs and information asymmetry can have a significant impact on a company's value and cost of capital.
Theoretical framework - The Modigliani-Miller approach remains an important theoretical framework for understanding the relationship between a company's capital structure and its value.
Specific circumstances - Financial analysts and investors must analyze a company's specific circumstances and determine the best capital structure for that company.