Modigliani-Miller Capital Structure Simulator

See Proposition II play out live: how leverage mechanically pushes up the cost of equity while the after-tax debt shield pulls the blended WACC down.

Reading This Tool

How To Use This Calculator

Set your unlevered cost of equity, cost of debt and tax rate, then drag the debt-to-equity slider to the leverage point you want to evaluate.

The chart shows cost of equity rising in a straight line as leverage increases, while WACC drifts downward, the mechanical result of the tax-deductible interest shield. The marked dot shows your selected D/E ratio on both curves at once, alongside the resulting firm value.

Your Inputs

Unlevered Cost of Equity (r₀) 10%

Cost of Debt (rᵈ) 5%

Corporate Tax Rate 26.5%

Debt-to-Equity Ratio To Evaluate 1.00

Unlevered Firm Value (Vᴺ) $10,000,000

Proposition I (no taxes): capital structure is irrelevant to firm value. Proposition II (with taxes): value rises with leverage by the present value of the interest tax shield, holding operating cash flows constant, the model ignores bankruptcy and financial distress costs entirely, which is exactly what makes it a teaching model rather than a real capital structure policy.

At This Leverage Point

Levered Cost of Equity (rᵉ)

WACC

Debt Tax Shield (PV)

Levered Firm Value (Vₗ)

Cost of Capital vs. Debt-to-Equity Ratio

Cost of Equity (rᵉ) Cost of Debt (rᵈ) WACC

This is the classical MM framework taught in corporate finance courses. Real-world capital structure decisions also weigh bankruptcy costs, agency costs, signaling effects, and financial flexibility, all deliberately excluded here to isolate the tax-shield mechanic.

Need this applied to an actual capital structure decision?

Continue to the WACC Calculator →