## MM Approach Without Tax (1958)
The NOI approach is definitional/conceptual — it asserts irrelevance but offers no behavioural justification. The Modigliani-Miller (MM) approach supplies that behavioural justification for why KO (and therefore VF) stays constant.
There are two MM models:
- MM 1958 — without tax
- MM 1963 — with tax
### MM Without Tax — Core Idea
- Similar in conclusion to the NOI approach: capital structure decisions are irrelevant.
- VF and KO always remain constant, unaffected by changes in the debt weight (Wd).
### The Three Propositions
Proposition 1 — Value of the firm
$$VF = \frac{EBIT\ (NOI)}{KO}$$
- Total value of the firm and KO remain constant.
- Therefore Value of levered firm = Value of unlevered firm.
Proposition 2 — Cost of equity rises with leverage
$$Ke = KO + (KO - Kd)\times \frac{Debt}{Equity}$$
- As the debt-equity ratio rises, Ke rises linearly — this is exactly what keeps KO constant.
Proposition 3 — What drives the cost of capital
- Capital structure does NOT affect KO.
- KO is affected only by business risk, not by financial risk.