The Times

Abstract

The chief financial officer (CFO) of a corporation in bygone times was charged with determining the optimal capital structure of the firm. The CFO had to answer certain questions. Should the corporation borrow to expand, should it issue additional preferred or common stock, or should it expand out of retained earnings and perhaps forego a dividend? Until Modigliani and Miller provided clarity to these important questions, the choices were considered more of an art than a science, despite John Burr Williams’s contribution in 1938. Franco Modigliani and Merton Miller showed that, under certain circumstances, the method of financing does not matter, at least with respect to shareholder value.