Believes that through a proper use of debt equity

believes that through a proper use of debt-equity proportions ,a firms can increase its total
value and result by reduce its overall cost of capital.
It believes that there is no optimum capital structure but it can be at an optimum level in a
range.
Note : Formulae used in NI approach is used for Traditional Approach as well.
4) Modigliani & Miller Approach ( MM Approach) :
This approach supports NOI approach relating to cost of capital and degree of
leverage. It maintains that the WACC is not affected with the proportion of debt to
equity on the capital structure.
MM approach offers behavioral justification for this statement (through Arbitrage
process).
Following three proposals are given under MM approach :
(i) Overall cost of Capital (Ko) and Value of enterprise are independent of its
capital structure. Ko and V are constant for different degrees of leverage.

³ ± ° ± ² ³
(ii) Ke increases in a manner to offset the use of sources of funds represented by
the less expensive means of debt.
(iii) The Cut-off rate is independent of the way in which investment is financed.
Assumptions: Followings are the assumptions :
1. There are perfect capital markets. (Means investors are free to buy and sell
securities).