Financial Management: Principles and Applications, 13/e

15.2 Capital Structure Theory

We open our discussion of capital structure choices in a hypothetical environment where financing choices do not affect firm value. In this setting, the financial manager should not be concerned about capital structure policy. Although the assumptions required for capital structure irrelevance are not realistic, they provide a good starting point for understanding the factors that financial managers should consider when determining their capital structure policy. We then relax these unrealistic assumptions and examine how they influence a firm’s incentives to use debt and equity financing.

A First Look at the Modigliani and Miller Capital Structure Theorem

Franco Modigliani and Merton Miller’s (M&M) analysis of ...