Modigliani/Miller Theorem: Capital Structure and Firm Value

This lecture explores the Modigliani/Miller Theorem, which states that in a perfect capital market, a firm's value is independent of its capital structure. The theorem is proven by assuming no taxes, no contracting costs, and a fixed investment policy. The implications of leverage on firm value, tax shields, and the relationship between risk and return are discussed. The lecture also covers the effects of leverage on earnings per share, the cost of capital, and the wealth of shareholders.