Miller

Definition

Miller, in the context of finance, refers to the Miller Modigliani theorem, a proposition about capital structure. It states that, under certain conditions, the value of a firm is unaffected by how it is financed, whether through debt or equity.

5 Must Know Facts For Your Next Test

1. The Miller Modigliani theorem assumes no taxes, bankruptcy costs, or asymmetric information.
2. It implies that in perfect markets, the choice between debt and equity financing does not affect a firm's value.
3. The theorem is foundational for understanding capital structure irrelevance.
4. Franco Modigliani and Merton Miller received the Nobel Prize in Economics for this theory.
5. The theorem has practical implications despite its assumptions being unrealistic; it serves as a benchmark for understanding real-world deviations.

Review Questions

• What are the main assumptions underlying the Miller Modigliani theorem?
• How does the Miller Modigliani theorem explain the irrelevance of capital structure?
• Why is the Miller Modigliani theorem important despite its unrealistic assumptions?

Related terms

Capital Structure: The mix of debt and equity financing used by a firm.

Debt Financing: Raising capital through borrowing (loans or bonds).

Equity Financing: Raising capital through selling shares of stock.