Discuss the principles presented by Modigliani and Miller and explain your agreement or disagreement.

Modigliani (1958) and Miller’s Modigliani Miller theorem states that, in an ideal market without taxes, bankruptcy costs agency costs or information asymmetry, a company’s value is not affected by the capital structure of its financing decisions. It is a principle I fully agree with, because it means that firms can choose the type of financing structure they want while still being able to achieve an optimal outcome. In certain situations, firms could also benefit from leveraging their assets in order to increase returns on equity. The Modigliani and Miller theorem also suggests that debt financing will not differ from equity funding, so companies can choose what is best for their business without having to worry about the higher costs.

This theory has some parts that I don’t agree with, namely the assumption of perfect markets, and how this ignores things like investor risk aversion, transaction costs, taxes, etc. All of these factors would influence any decision a company makes regarding its financial future. Remember that different countries may have different laws and regulations regarding borrowing money. This is important when considering corporate financing strategies. Therefore although I believe Modigliani-Miller provides useful guidance regarding finance related issues in certain situations ,there remain several other variables both external and internal which need to be accounted for order make sure company’s finances are managed responsibly.