According to the Modigliani-Miller theorem, how does a firm's capital structure affect its total value in perfect capital markets?

The Modigliani-Miller theorem posits that in perfect capital markets—where there are no taxes, bankruptcy costs, or transaction costs—a firm's capital structure does not influence its total value. This means that whether a firm is financed through equity or debt, its overall value remains the same. The underlying reasoning is based on the idea that investors can create their own leverage. If a firm changes its capital structure by increasing debt, investors can mimic this leverage on their own, thereby negating any direct impact on the firm's valuation.

Therefore, the conclusion is that, in these ideal conditions, the type of financing a firm chooses has no bearing on its total value, reinforcing the notion that capital structure decisions are irrelevant to the overall worth of the business. This encapsulates the essence of the theorem and highlights its foundational role in corporate finance.