Miller and Modigliani derived the theorem and wrote their
groundbreaking article when they were both professors at the
Graduate School of Industrial Administration (GSIA) of Carnegie
Mellon University. It is said that Miller and Modigliani were set
to teach corporate finance for business students despite the fact
that they had no prior experience in corporate finance. When they
read the material that existed they found it inconsistent so they
sat down together to try to figure it out. The result of this was
the article in the American Economic Review and what has later been
known as the M&M theorem.
The theorem was originally proven under the assumption of no
taxes. It is made up of two propositions which can also be extended
to a situation with taxes. Consider two firms which are identical
except for their financial structures. The first (Firm A) is
unlevered: that is, it is financed by equity only. The other (Firm
B) is levered: it is financed partly by equity, and partly by debt.
The Modigliani-Miller theorem states that the value of the two
firms is the same.