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General Proof of Modigliani-Miller Propositions I and II Using Parameter-Preference Theory

Published online by Cambridge University Press:  06 April 2009

Jack Becker
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Extract

The following proof of Modigliani and Miller's (MM) [2] famous propositions concerning the valuation of the firm and the cost of capital does not require the usual risk-class or arbitrage assumptions; the proof depends only on the Fundamental Theorem of Parameter-preference, which states that the riskpremium for security A is a linear combination of its comoments with the market index, .

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 1 , March 1978 , pp. 65 - 69
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

REFERENCES

[1]Hamada, Robert S. “Portfolio Analysis, Market Equilibrium and Corporate Finance.” Journal of Finance (03 1969), pp. 13–31.CrossRefGoogle Scholar
[2]Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review (06 1958).Google Scholar
[3]Rubinstein, M. “The Fundamental Theorem of Parameter-preference Security Valuation.” Journal of Financial and Quantitative Analysis (01 1973).CrossRefGoogle Scholar
[4]Stiglitz, J. E. “A Re-examination of the Modigliani-Miller Theorem.” American Economic Review (12 1969), pp. 784–793.Google Scholar
[5]Weston, J. F., and Brigham, E. F.. Managerial Finance, 3rd ed.New York: Holt, Rinehart and Winston (1969).Google Scholar