Question

Explain the various Theories of Capital Structure and describe the factors influencing Capital Structure of a firm.

29 Feb 2024
Answer :
Word Count : 638

Theories of Capital Structure:

Capital structure refers to the mix of debt and equity financing used by a firm to fund its operations and investments. Several theories have been proposed to explain the optimal capital structure of a firm:

1. Modigliani-Miller (MM) Propositions:
   - MM Proposition I (without taxes): States that the value of a firm is independent of its capital structure when there are no taxes or bankruptcy costs. This implies that the cost of equity and the weighted average cost of capital (WACC) remain constant regardless of the debt-equity ratio.
   - MM Proposition II (without taxes): States that the cost _______ ____ __________ ________ _______ _______ ______ ___.
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