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Capital structure is understood as the relationship between equity and debt capital of the company. Does capital structure affect the company’s main settings, such as the cost of capital, profit, value of the company, and the others, and, if it affects, how?
28 sty 2017 · Purpose of this study is to review various capital structure theories that have been proposed in the finance literature to provide clarification for the firms’ capital structure decision.
By using the valuation and capital structure approach with several assumptions necessary to be made, the author has found out that the Modigliani Miller theories of capital structure do hold and are accurate for those given sample companies in representative to an industry.
One of the two main theories of capital cost and capital structure is the theory of Nobel Prize winners Modigliani and Miller (1958, 1963, 1966). In this chapter, we describe the main results of this theory. Under the capital structure, one understands the relationship between equity and debt capital of the company.
26 sty 2023 · The review examines the state of the capital structure and capital cost theory from the middle of the last century, when the first quantitative theory was created, to the present.
Modigliani-Miller Theorem. Proposition (1958): Capital structure irrelevance. — Intuition: ∗ Value additivity. If operating cashflows are fixed, value of the pie. unaffected by split-up of the pie. — Assumptions: ∗ No taxes. ∗ No costs of financial distress / no other transaction costs. ∗ Fixed, exogenous operating cashflows.
To elucidate this point, consider the MM theorem about the irrelevance of capital structure. It states that the amount and structure of debt taken up by a company do not affect its value if: 1) there are no taxes, 2) bankruptcy does not entail any real liquidation costs for the company nor any reputation
