Mediaspace scheduled maintenance: Aug 25, 2026 07:00 - 12:00 AM. During this time, videos will be temporarily unavailable. Check status updates.

Lecture

Modigliani/Miller Theorem: Firm Value and Capital Structure

In course

FIN-401: Introduction to finance

The course provides provides an introduction to valuation techniques, investment decisions, asset valuation and portfolio choice, financing decisions, derivatives pricing, and sustainable finance. ...

Description

This lecture introduces the Modigliani/Miller Theorem, which states that in a perfect capital market without taxes or contracting costs, a firm's value is independent of its financing policy. The theorem is proven through examples of two firms with different capital structures but identical cash flows. The implications of the theorem on investment policy, logic, and the relationship between debt, taxes, and firm value are discussed. The lecture also covers the effects of leverage on earnings per share, stock price, and total firm value, emphasizing the importance of maximizing total firm value rather than just equity value.

This video is available exclusively on Mediaspace for a restricted audience. Please log in to MediaSpace to access it if you have the necessary permissions.

Watch on Mediaspace

Instructor

Erwan Morellec

ERWAN MORELLEC is Swiss Finance Institute Professor and Professor of Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. He is also the Head of the SFI Léman Centre, the Head of the SFI nation-wide PhD Program, and a CEPR Research Fellow. Formerly on the faculties of the Simon School of Business of the University of Rochester (USA) and HEC Lausanne (Switzerland), he holds a Ph.D. in Finance from HEC Paris. Professor Morellec is most active in the areas of corporate finance and banking and has taught several courses on these subjects to undergraduate, MBA, and doctoral students. His recent research examines the effects of prudential regulation on banks' insolvency risk or the effects of financial market imperfections on corporate investment, financing, and risk management decisions. His research has been presented at major academic conferences and seminar series around the world and is published in top rated academic journals such as the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and the Journal of Economic Theory. He has received several research and teaching awards.

Official source

Ontological neighbourhood

Business

Finance: Corporate finance

Related concepts (32)

Capital structure

In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage (or gearing, in the United Kingdom) the firm is said to have.

Cost of capital

In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. For an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital.

Tax

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax reliefs.

Share price

A share price is the price of a single share of a number of saleable equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets. This practice has its basis in the presumption that investors act rationally and without biases, and that at any moment they estimate the value of an asset based on future expectations.

Leverage (finance)

In finance, leverage (or gearing in the United Kingdom and Australia) is any technique involving borrowing funds to buy things, estimating that future profits will be many times more than the cost of borrowing. This technique is named after a lever in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the smaller amounts of money needed for borrowing into large amounts of profit. However, the technique also involves the high risk of not being able to pay back a large loan.

Related lectures (32)

Carbon Removal Technologies: Climeworks Innovations

Explores Climeworks' innovative carbon removal technologies and their impact on combating global warming through direct air capture.

Equity Carve-Outs: IPO Strategies

Delves into equity carve-outs, spinoffs, and behavioral finance concepts, with practical case studies on IPO strategies and market dynamics.

Sources of Capital & Financial Modelling

Covers the importance of financial data for startups and sources of capital.

Real Estate Co-Financing

Explores real estate co-financing, weighted average cost of capital, debt implications, and leveraging property value for liquidity.

Asset Pricing: Excess Volatility Puzzle

Explores the Excess Volatility Puzzle in asset pricing, analyzing stock price discrepancies and return predictability.

Related concepts (32)