Modigliani & Miller Proposition

Proof 2:

Consider two firms with identical investment projects. Firm U is 100% equity finance. In other words, it is unlevered (V_U = E_U). Firm L has some amount of debt in its capital structure. In other words, it is levered (V_L = E_L + D_L).

	Case 1: 1% of U	Case 2: 1% of L
Cost	.01V_U	.01V_L=.01E_L+.01D_L
Return	=.01 Profits	=.01(Profits-Interest)+.01 Interest
		=.01(Profits)

These two investment opportunities have the same returns, therefore they must have the same price. That they have the same price means that the different capital structures had no affect on firm value.