Modigliani-Miller Theory of the Cost of Capital

Discipline: Economics

Named after Italian-born American economist Franco Modigliani (1918-2003) and American economist MERTON MILLER (1923-2000), Modigliani-Miller theory of the cost of capital states that the overall cost of capital remains constant as the financial gearing of a firm increases.

Critics have suggested that the theory ignores the risk of bankruptcy as a firm's debt increases.

Source:
M H Miller and F Modigliani, 'Dividend Policy, Growth, and the Valuation of Shares', Journal of Business, vol. XXXIV (October, 1961), 235-64

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