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Chapter 7
Modigliani and Miller’s (M & M’s)
gearing theories
3.1 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 k d remains constant at all levels of gearing.
Investors are indifferent between personal and corporate gearing.
Investors and companies can borrow at the same rate of interest.
3.2 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.
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