This is based on the premises that real valuation of a company is based on the fact that it belongs to equity holders and value of capital employed has different perspective to value of business for share holders as a whole.

Modigliani & Miller Theorem states that:

The proposition (which was largely responsible for winning Nobel prizes for Modigliani & Miller) that, in an efficient capital market with no tax distortions, the relative proportion of debt and equity in a corporate capitalization does not affect the total market value of the firm. And in tax world the weighted average cost of capital will be decreased because of saving in tax (tax shield) and market value of firm will increase.

In contrary to above this theorem (Real Business Valuation) claim that under the same major assumptions taken by Modigliani & Miller:

Either it is a tax world or no tax world value will remain un-changed for an un-geared firm (100% financed through equity) and the value of a firm financed through proportion of debt and equity, will be decreased and there is no tax saving when compared with risk & costs analysis in long run.

Real concept of valuation will highlight that:

• WACOC is fixed and shall not decrease with the increase in Gearing; whereas Modigliani & Miller claimed that in tax world, with increase in gearing WACOC will decrease. However the fact is that WACOC is fixed and will not decrease with the increase in gearing.

• Tax Shield is a wrong Concept: Modigliani & Miller claimed that Tax Shield should be added to calculate the value of company. This addition is duplication. Value of tax for equity holders of Geared & Un-geared Company is same, provided equity investment is same.

• Relation of Ro & Re: MM claimed that in tax world we can calculate Re & Ro through following formula:

  Re = Ro + (Ro-Rd)(1-Rt) (D/E)

  Re calculated through above formula is incorrect and does not match with original Re figures.

• NET RESULTS shows that Increase in Gearing will result in decrease in value of business for share holders.