MM approach advocates that value of firm is not affected by Capital Structure. There are two types of Firm 

1. Levered Firm
2. Unlevered Firm

1. Levered Firm  : levered firm is a company witch has  debt proportion in their Capital Structure.

1. Unlevered Firm : Unlevered is an all-equity firm, or An unlevered firm is a company witch has no debt, and is referred to as unlevered because it doesn’t have financial leverage. Financial leverage is created when a company utilizes borrowing, usually from lenders, or from investors, by issuing debt through bonds or preferred stock.

Modigliani-Miller Proposition I

States that in the absence of taxes, the value of a levered firm equals the value of an otherwise identical unlevered firm.

Modigliani-Miller Proposition I (No Taxes):   V_L =V_U

The value of a levered firm equals the market value of its debt plus the market value of its equity.

M-M’s arbitrage process argument is based on the following assumptions:

(a) Personal or homemade  and corporate leverage are perfect substitutes;

(b)  Transaction cost does not exist

(c) Rate of interest at which company can borrow money is also available to  individuals.

(d) Institutional investors are free to deal in securities;

(e) There are no taxes.

(f) Borrowings are risk-less.

(g) Investors are fully knowledgeable and rational.