[Verse 1]
In a perfect world where markets flow so free
No taxes, no friction, just pure efficiency
Franco and Merton had a theory to share
About capital structure and how firms should dare
To mix their debt and equity in any way
The value stays the same, that's what they say
[Chorus]
M and M, Proposition One
Firm value's set, the funding's done
Debt or equity, it's all the same
Perfect markets play the perfect game
M and M, Proposition Two
Cost of equity rises as debt comes through
But WACC stays flat, the magic's clear
Capital structure doesn't matter here
[Verse 2]
Imagine a company worth one million today
Split fifty-fifty debt and equity they say
But wait, let's change it to twenty-eighty split
The total value doesn't move one single bit
Investors can create their own leverage at home
So corporate structure leaves them free to roam
[Chorus]
M and M, Proposition One
Firm value's set, the funding's done
Debt or equity, it's all the same
Perfect markets play the perfect game
M and M, Proposition Two
Cost of equity rises as debt comes through
But WACC stays flat, the magic's clear
Capital structure doesn't matter here
[Bridge]
When debt goes up, equity holders fear
Financial risk makes their returns unclear
They demand more yield for taking the chance
But weighted average cost stays in perfect balance
Arbitrage keeps everything in line
In this theoretical world so fine
[Verse 3]
The assumptions make this theory work so well
Perfect information, no taxes to tell
No bankruptcy costs or agency fees
Just rational investors sailing the seas
Of efficient markets where prices are right
And capital structure fades from sight
[Chorus]
M and M, Proposition One
Firm value's set, the funding's done
Debt or equity, it's all the same
Perfect markets play the perfect game
M and M, Proposition Two
Cost of equity rises as debt comes through
But WACC stays flat, the magic's clear
Capital structure doesn't matter here
[Outro]
Modigliani and Miller showed the way
In perfect worlds what finance scholars say
The foundation built for all to see
Capital structure irrelevancy