Proposition that a firm’s capital cost is independent from the capital type employed in an efficient capital market. Debt, ordinary shares or common stock sold, retained dividend earnings, or any combination of these finance the firm’s capital needs, not affecting its market value. This concept focuses on what investors look for: earnings quality, expected return rate, and associated risks. Little focus is put on the firm’s dividend policy or how leveraged it is. Capital market imperfections and government’s taxation policies effect causes worry among firms. Nobel laureates Italian economist Franco Modigliani (1918) and the US economist Merton H. Miller (1923) proposed this. Refer to leverage.
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