What is the 'ModiglianiMiller Theorem  M&M'
The ModiglianiMiller theorem (M&M) is a financial theory stating that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of the way it chooses to finance its investments or distribute dividends. Remember, a firm can choose between three methods of financing: issuing shares, borrowing or spending profits (as opposed to dispersing them to shareholders in dividends). The theorem gets much more complicated, but the basic idea is that, under certain assumptions, it makes no difference whether a firm finances itself with debt or equity.
BREAKING DOWN 'ModiglianiMiller Theorem  M&M'
In "Financial Innovations and Market Volatility" Merton Miller explains the concept using the following analogy:
"Think of the firm as a gigantic tub of whole milk. The farmer can sell the whole milk as is. Or he can separate out the cream and sell it at a considerably higher price than the whole milk would bring. (That's the analog of a firm selling lowyield and hence highpriced debt securities.) But, of course, what the farmer would have left would be skim milk with low butterfat content and that would sell for much less than whole milk. That corresponds to the levered equity. The M and M proposition says that if there were no costs of separation (and, of course, no government dairysupport programs), the cream plus the skim milk would bring the same price as the whole milk."

Irrelevance Proposition Theorem
A theory of corporate capital structure that posits that financial ... 
Payment
The transfer of one form of good, service or financial asset ... 
Bayes' Theorem
A formula for determining conditional probability named after ... 
Price Skimming
A product pricing strategy by which a firm charges the highest ... 
Merton Miller
A prominent Chicago school economist. Miller was born in 1923 ... 
Dividend
A distribution of a portion of a company's earnings, decided ...

Investing Basics
Understanding the ModiglianiMiller Theorem
The ModiglianiMiller (M&M) theorem is used in financial and economic studies to analyze the value of a firm, such as a business or a corporation. 
Stock Analysis
WalMart Eyes Declining Product Category for Growth
Retail giant WalMartÂ (NYSE: WMT)Â continues to plan for future growth and will be building a huge milk processing facility in Indiana that will employ some 200 people. The 250,000 squarefoot ... 
Stock Analysis
Dean Foods Buys Friendly's Ice Cream Making Unit
Sweet! Dairy producer Dean Foods (NYSE: DF) announced it was buying the ice creammaking business of Friendly's for $155 million. The 260location restaurant side of the business will remain ... 
Investing News
Dean Foods' Estimates Rise Ahead of Earnings (DF)
Got Milk? Given the rate at which Dean Foods' milking profits, the stock's fair value can reach $25 in 12 months, suggesting 20% gains from current levels. 
Fundamental Analysis
Explaining the Central Limit Theorem
Central limit theorem is a fundamental concept in probability theory. 
Budgeting
5 States Where You Can Stretch Your Dollar The Furthest
If you're thinking of moving to save a few dollars here and there, we've got a list of states for you to consider. 
Stock Analysis
Dean Foods Goes Sour
Dean Foods had a rough season, with earnings halved compared to last year's same quarter. 
Investing Basics
How Dividends Work For Investors
Find out how a company can put its profits directly into your hands. 
Stock Analysis
How Expensive Is Whole Foods, Really? (WFM)
Learn about Whole Foods Market, Inc., and discover how Whole Foods pricing actually compares to that of other grocery store operations. 
Investing
What is Equity Financing?
Companies that are short on cash may need financing to pay for shortterm needs or longterm capital expenditures.

What is Fisher's separation theorem?
Fisher's separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless ... Read Answer >> 
There is no obligation to pay out dividends even for those firms that have traditionally ...
Could you please explain this? "Some companies pay out dividends, but many others do not. And there is no obligation ... Read Answer >> 
Why do some companies pay a dividend, while other companies do not?
Dividends are corporate earnings that companies pass on to their shareholders. There are a number of reasons why a corporation ... Read Answer >> 
How do dividends affect retained earnings?
Find out how distribution of dividends affects a company's retained earnings, including the difference between cash dividends ... Read Answer >> 
What are the benefits and shortfalls of the HerfindahlHirschman Index?
Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >> 
When should a business avoid debt financing?
Read about the optimal use of debt in a business capital structure and how to know when a business should avoid further debt ... Read Answer >>