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2021 | OriginalPaper | Chapter

3. Capital Structure: Modigliani–Miller Theory

Authors : Peter Brusov, Tatiana Filatova, Natali Orekhova

Published in: Ratings

Publisher: Springer International Publishing

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Abstract

One of the three main theories which consists of the basis for conducting modification of existing rating methodologies is the theory of Nobel Prize winners Modigliani and Miller (Am Econ Rev 48:261–297, 1958). In this chapter, we describe in short the main results of this theory, the understanding of which is absolutely necessary for the modification of existing rating methodologies.

Capital structure is understood as the relationship between equity and debt capital of the company. Does capital structure affect the company’s main settings, such as the cost of capital, profit, value of the company, and the others, and, if it affects, how? Choice of an optimal capital structure, i.e., a capital structure, which minimizes the weighted average cost of capital, WACC, and maximizes the value of the company, V, is one of the most important tasks solved by financial manager and by the management of a company. The first serious study (and first quantitative study) of the influence of capital structure of the company on its indicators of activities was the work by Modigliani and Miller (1958). Until this study, the approach existed (let us call it traditional), which was based on empirical data analysis.

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previous chapter The Importance of Rating and the Disadvantages of Existing Rating Systems

next chapter Modification of the Modigliani–Miller Theory for the Case of Advance Tax on Profit Payments

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Title: Capital Structure: Modigliani–Miller Theory
Authors: Peter Brusov
Tatiana Filatova
Natali Orekhova
Publisher: Springer International Publishing
Book: Ratings
Print ISBN: 978-3-030-56242-7

Electronic ISBN: 978-3-030-56243-4

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-56243-4_3