Modigliani/Miller Theorem: Firm Value and Capital Structure

This lecture introduces the Modigliani/Miller Theorem, which states that in a perfect capital market without taxes or contracting costs, a firm's value is independent of its financing policy. The theorem is proven through examples of two firms with different capital structures but identical cash flows. The implications of the theorem on investment policy, logic, and the relationship between debt, taxes, and firm value are discussed. The lecture also covers the effects of leverage on earnings per share, stock price, and total firm value, emphasizing the importance of maximizing total firm value rather than just equity value.