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It is a theory in finance universe claims that market value of a firm is a function of both its cash generating power (its earnings) and risk level of its assets. Also this theory ignores the effect of company's method to finance its investments and payout dividends. As everybody knows that, methods or reseources of financing investment can be categorized like borrowings and equity (issuing shares). This theory doesn't recognize any major difference between these two types of financing in terms of effecting market value of a firm.
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