The cost of capital: an evaluation of the Modigliani-Miller propositions

The concept capital cost occupies a position of unquestioned importance in the field of business finance. In recent years, such research found theoretical work has been done in this field by both theorists and practitioners. An evaluation of their results in total would require a paper of considerably greater length and higher degree of of sophistication than is intended here. This paper, is, therefore, confined to an evaluation of the most popular of the more recent theories, namely, the Modigliani Killer propositions. In order to clearly define the purpose of this paper, it is necessary to state that this paper is intended In no way to derive a new formula for measuring the cost of capital. Its purpose is merely to state the problem and some of the early attempts to solve it, and then to present the Modigliani Killer theory. This theory is explained, and an attempt is made to show how it is being attacked and the measures being taken to defend it.