Capital structure

F. WHAT DOES CAPITAL STRUCTURE THEORY ATTEMPT TO DO? WHAT LESSONS CAN BE LEARNED FROM CAPITAL STRUCTURE THEORY?
ANSWER: CAPITAL STRUCTURE THEORY PROVIDES SOME INSIGHTS INTO THE VALUE OF DEBT VERSUS EQUITY FINANCING. AN UNDERSTANDING OF CAPITAL STRUCTURE THEORY WILL AID A MANAGER IN FINDING HIS OR HER FIRM¡¦S OPTIMAL CAPITAL STRUCTURE.
MODERN CAPITAL STRUCTURE THEORY BEGAN IN 1958, WHEN MODIGLIANI AND MILLER PROVED, UNDER A VERY RESTRICTIVE SET OF ASSUMPTIONS, INCLUDING THE ASSUMPTION OF NO TAXES, THAT A FIRM¡¦S VALUE IS UNAFFECTED BY ITS CAPITAL STRUCTURE. MM¡¦S RESULTS SUGGEST THAT IT DOESN¡¦T MATTER HOW A FIRM FINANCES ITS OPERATIONS BECAUSE CAPITAL STRUCTURE IS IRRELEVANT. DESPITE ITS U...