Irrelevance Proposition Theorem

The irrelevance proposition theorem theorizes that financial leverage...i.e. debt, loans...does not affect the value of a company...as long as there are no distress costs (which means they’d be having trouble making payments) nor income tax (another cost) on the business.

The irrelevance proposition theorem is the main premise of “The Cost of Capital, Corporation, Finance, and Theory of Investment," a journal article that won a Nobel Prize. Or rather, the authors did. The two dudes who came up with this, Miller and Modigliani, argued that, in an efficient market with no added fees (and assuming they’re not on the verge of bankruptcy), the value of a company shouldn’t depend on how it’s being financed, since investors can buy in or sell out at any time.

Of course, in the real world, there are income taxes on businesses...but hey, the real world is always messier than our theorems about how the world works. Rather than being a theorem based on how businesses work, it’s more of a window into financing options for businesses.