The Modigliani–Miller paper and theorem is a well-regarded axiom on the capital structure if a business. It is effectively the cornerstone of modern corporate finance, in the same way was Newton’s 3 laws of motion are to modern physics.

It is states:

(1) In an environment, where there are no taxes, default risk or agency costs, capital structure is irrelevant.
(2) The value of a firm is independent of its debt ratio and the cost of capital will remain unchanged as the leverage changes.

It is quite a complex theorem that has come from papers in the 1950’s and 1960’s. However the world does have taxes, and the cost of doing business (agency costs) are real. So what this then means, under that under some conditions, the optimal capital structure can be complete debt finance due to the preferential treatment of debt relative to shares (equity) in a tax code. For example, in the UK and most other market economies interest payments on debt are excluded from company taxes.

Thus what this means, is a company carrying debt, is worth more to investors, as it pays less tax (interest payments are off set against tax, thus create something called the tax shield).
Thus companies took out debt (issuing bonds) to finance the business also have the advantage to be able to reduce its tax bill and thus enhancing its overall value to investors.

The importance of this cannot be under-estimated, companies that have issued debt, are helping to pay for pensions (buyers of the bonds are investors like pension funds who need the interest [coupon payment] to pay their deserving pensioners).

However there are always pros and cons to debt.

Advantages of Borrowing:

1. The Tax Benefit:  (the tax shield): thus, higher tax rates mean greater tax benefit to the company
2. Added Discipline: (got to meet debt payments, focusses the business on delivering cash flows)

Disadvantages of Borrowing

1. Bankruptcy Cost: If fail to meet bond payments then the business is made bankrupt.
2. Agency Cost: (2 sets of people to please, shareholders and creditors) thus a greater the separation between shareholders & lenders which mean thus a higher cost of business
3. Loss of Future Financing Flexibility: If carrying debt, then harder to borrow more, which means more uncertainty about future financing needs