... Miller and Modigliani's (MM) Irrelevance theorem of 1958 was one of the first noteworthy steps to understanding the complex nature of a firm's capital structure. Although this theory contains many assumptions which may sound unrealistic, this approach has proved to be a good start in order to understand some of the basic underlying principles at work. Before evaluating the MM approach it is important to understand the assumptions underlying the propositions of this theorem. MM assumed that there were perfect capital markets, implying that there are no brokerage costs; perfect information is available to all economic agents; individuals and corporations borrow at the same rate and that there are no costs of financial distress(bankruptcy costs) and liquidation, therefore debt is risk free. The theorem was also based on; no taxation, the ability to categorise firms into distinct risk classes and that the firm's manager is selfless and always acting in ...

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