Definition of Modigliani-Miller Thorem: The Modigliani-Miller Theorem is that the total value of the bonds and equities issued by a firm in a model is independent of the number of bonds outstanding or their interest rate.

The theorem was shown by Modigliani and Miller, 1958 in a particular context with no fixed costs, transactions costs, asymmetric information, and so forth. Analogous theorems are shown in various contexts. The assumptions made by such theorems offer a way of organizing what it would be that makes corporations choose to offer various levels of bonds. The choice of numbers and types of bonds and stocks a corporation offers is the choice of capital structure. Among the factors affecting the capital structure of a firm are taxes, bankruptcy costs, agency costs, signalling, bargaining position in litigation, and differences between firms and investors in access to capital markets. (Econterms)

Terms related to Modigliani-Miller Thorem:

• Capital Structure