Discuss the principles presented by Modigliani and Miller and explain your agreement or disagreement.

Modigliani and Miller (1958) proposed the Modigliani-Miller theorem, which states that in a perfect market with no taxes, bankruptcy costs, agency costs or asymmetric information, the value of a firm is unaffected by its capital structure or financing decisions~. I agree with this principle as it implies that firms should be able to choose whatever type of financial structure they prefer while still achieving an optimal outcome. This also means that firms can leverage their assets when making investments which could have positive benefits in certain cases such as increasing returns on equity. In addition, the Modigliani-Miller theorem suggests that there will be no difference between debt and equity financing so firms are free to decide what works best for them without worrying about higher costs associated with one form versus another.

I do disagree with some aspects of this theory however; namely how it assumes perfect markets and ignores factors like risk aversion from investors, transaction costs, tax considerations etc., all of which would affect the outcomes of any given financial decision made by a firm. It is also important to remember that not all countries have the same regulations/laws surrounding borrowing money so different regulations need to be taken into account when considering any kind of corporate financing strategy. Therefore although I believe Modigliani-Miller provides useful guidance regarding finance related issues in certain situations ,there remain several other variables both external and internal which need to be accounted for order make sure company’s finances are managed responsibly.