Extract
On Corporate Debt Policy
INTRODUCTION
The mix of securities that a firm issues to finance its operations is known as its capital structure. Modigliani and Miller (1958) in their proposition I (M&M) state that, within a perfect economy, a firm cannot change its total value by varying its capital structure. This proposition allows a value maximizing firm to completely separate its real and its financial decisions. Consequently, when MM's irrelevancy result holds, a firm may maximize its value by focusing exclusively on capital budgeting decisions, without worrying about capital structure. In effect, M&M provide a separation principle belonging to a family of such principles. (Such as the Fisherian separation-paradigm which states that only real economic variables affect a firm's production decisions and output.) Various economic interpretations of M&M's irrelevancy proposition have helped to enrich our understanding of corporate finance. Let us briefly focus on four such interpretations.1. M&M's irrelevancy result may be viewed as a basic value-additivity principa...See the full content of this document
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