What is the primary implication of the 'Modigliani-Miller Theorem' in corporate finance under assumptions of perfect capital markets and no taxes?

💡 Solution & Explanation

The Modigliani-Miller Theorem posits that under conditions of perfect capital markets, zero taxes, and no transaction costs, the market value of a firm is determined by its earning power and asset risk rather than its capital structure or debt-to-equity mix. Consequently, the way a company finances its operations through debt versus equity does not affect its overall valuation. This foundational corporate finance theory challenges traditional views that suggested an optimal capital structure existed. Real-world market imperfections like taxes modify these strict theoretical conclusions.