The foundational theorems (Modigliani-Miller 1958, 1961) establishing that in a frictionless market - no taxes, no bankruptcy costs, no asymmetric information, no transaction costs - firm value is independent of capital structure (Proposition I) and dividend policy. Proposition II states that the cost of equity rises linearly with the debt-to-equity ratio, leaving WACC unchanged. With corporate taxes, the tax shield makes leverage value-additive, motivating the trade-off theory.