The Application Of MM Theorem In Corporate Finance

Modigliani and Miller were the first two persons to bring the No-arbitrage theory into corporate finance area. In 1958, they published a paper together with the title of capital cost, corporate finance and investment theory. In the paper they expressed the thought that the construction of the finance in one company had no relation with the market value (Modigliani-Miller theory also can be called MM theory).MM theory points out that under the condition that the information of investment is enough, capital market go efficiently, corporation investment policy and financial policy are independent with each other, there is no income tax for both the corporate and the individual, there exist no bankrupting risk and no market exchange cost, the construction of the finance in one company had no relation with the market value. The contribution of this theory is that it proves that under a certain condition, the construction of the finance in one company had no relation with the market value. It means that as for any corporate operator, the effort to enlarge the market value by changing the financial construction does not help. Before the appearing of MM theory, the discussing to the relationship between the corporate financial construction and the market value last several decades. Meanwhile their theory (Modigliani and Miller) makes corporate finance have strict analyzing methods and theoretic foundation. It can be said that the theory sets a basic foundation for the subject of corporate finance.The research of corporate finance started much late in China. The systematic research has just appeared in recent years. Although, some achievement was received, as a complete unit we are far away from the international level. There are little applied mathematical models. On the basis of complete research to the theory such as modern financial economic theory and corporate finance theory, etc, using modern math methods and tools, this paper dose a systematical research of No-arbitrage theory and MM theory. It's expected to get some referential scientific theory for the practice of corporate fiance in China.The entire paper contents three chapters. The first chapter introduces the developing path and the present situation of the corporate finance in China. The second chapter does some analysis of the weak points of No-arbitrage theory and MM theory, as well as the weak points of MM theory to corporate finance. The last chapter makes some modifying to Modigliani and Miller theory when considering bankrupt and tax.