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Modigliani–Miller theorem


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The theory that in a perfect capital market the value of a firm is independent of the method of financing used. Capital can be raised by borrowing, issuing equity shares, or retaining profits instead of paying dividends. The Modigliani–Miller theorem asserts that in a perfect capital market it does not matter to a firm whether it uses debt or equity, or what dividend policy it follows. The fact that firms do worry about their leverage and dividend policies reflects the effects of the tax system and imperfection in the capital market.

Subjects: Economics.


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