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Capital structure

Modigliani and Miller (M&M) – 1958

theory with no taxation

5.1 M & M's key assumptions

There exists a perfect capital market in which there are no information costs or
transaction costs.

Debt is risk free and kd remains constant at all levels of gearing.

No taxation

5.2 M & M's no tax theory

Under M & M’s theoretical assumptions, and in the absence of tax,
the two opposing factors cancel out exactly, so the WACC (and
business value) is constant at all levels of gearing.

Cost of k e
capital %

WACC

k d

Gearing (D/E)

349