the Modigliani-Miller theorem says

The Modigliani-Miller theorem posits that in an idealized world without taxes, bankruptcy costs, agency costs, and asymmetric information, a firm's value remains unchanged regardless of its financing mix. This principle challenges traditional views that debt and equity have different impacts on a firm's value.

The theorem's foundational idea is that the total value of a firm is determined by its assets and future earning potential, not by how it finances those assets. Whether a firm raises money through debt or equity, the overall value of the firm remains constant in a perfect market.

However, when taxes are introduced into the equation, the theorem adapts. In a world with taxes, debt becomes more attractive due to the tax shield provided by interest payments. This results in an increase in firm value proportional to the amount of debt issued, as the firm saves on taxes by deducting interest expenses.