Exploring the MM Proposition: Insights and Implications in Modern Economic Theory

Introduction

The Modigliani-Miller (MM) Proposition, formulated by economists Franco Modigliani and Merton Miller in the 1950s, serves as a cornerstone of modern financial theory. This proposition posits that, under certain conditions, a firm’s value is unaffected by its capital structure, implying that the way a firm finances itself—through equity or debt—does not influence its overall market value. The purpose of this report is to explore the implications of the MM Proposition in contemporary economic theory, examining how its assumptions and conclusions have shaped financial practices, corporate governance, and economic policies. By analyzing the theoretical underpinnings and real-world applications, this report aims to shed light on the enduring relevance of the MM Proposition in understanding capital structure decisions.

Main Body

The MM Proposition rests on several critical assumptions: perfect capital markets, no taxes, no bankruptcy costs, and rational inv