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02/22/2012

The value of a firm is independent of its capital structure


"Back in 1958, Modigliani and Miller ( M&M ) suggest that the value of a firm is independent of its capital structure (its debt/ equity ratio). Since then, the optimal balance between debt and equity financing has been a central issue in corporate finace."

You are requried to

1. Discuss the extent to which capital structure decisions can affect the value of a firm. (approximately 600 words)
(Explain basic idea of Modigliani, then come to conclusion whether capital structure can affect the firm)

2. Discuss the different theories on capital structure and evaluate the extent to which these theories are supported emprically. (approximately 1400 words)
(theories such as taxation, argency, trade off thoery, pecking order theory...)
 

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