The Importance of the M&M Proposition

Nobody believes that capital structure is actually irrelevant.

So what's the point?

If we believe that capital structure is relevant to firm value, then M&M have given us three places to look for the source of that value.

Remember:

If:

• financial policy affects firm value

Then it must be because at least one of the following is true:

• financial policy affects a firm's tax obligation
• financial policy affects contracting costs
• financial policy affects real investment policy