M&M Proposition 1 assumes that the mix of debt and equity that a company chooses does not affect real investment policy.

Question

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According to the Modigliani-Miller (M&M) Proposition 1, the mix of debt and equity that a company chooses does not affect its real investment policy. This proposition is based on the assumptions of perfect capital markets, no taxes, no transaction costs, no bankruptcy costs, and investors having the same information. However, in the real world, these assumptions may not hold true, and the mix of debt and equity a company chooses may affect its real investment policy.

M&M Proposition 1 Assumes That the Mix of Debt and Equity