Theories of Capital Structure

In this regard, it can be inferred that the financial manager's attention is focused on the portfolio of securities that attract the largest number of investors and can maximize the value of the company. Weston and Brigham (1992) also define the same view. The most advantageous capital structure is the capital structure that maximizes the market value of the company's outstanding shares. Based on the above theory a lot of research has been done to find the impact of capital structure on the profitability of the company.

The two major theories of capital structure are "balance" (Modigliani and Miller, 1958) and "Pecking-order" (Donaldson, 1961) theory. First, it is pointed out that the optimal capital structure should be able to balance bankruptcy risk and debt reduction and provide shareholders with a higher return than what they get from a wholly owned company. The latter indicates that the actual company's leverage ratio reflects the company's practice of using internal funds to fund new investments if possible. According to Marshall and McCormick (1986), the company tends to determine the liabilities and capital included in the capital structure based on the company's ownership structure, risk attitude, and other considerations such as taxes and taxes. Affects the highest proportion company WACC

Modigliani and Miller's capital structure theory has two propositions. 1) the total value of the company is independent of its capital structure, 2) the return on equity capital goes up, the first argument of risk is that taxes themselves are the taxes themselves, It is based on the assumption that choosing the capital structure of the company will not convey important information to the market, not before not being received. For Ford and its investors the significance of Modigliani and Miller uses this money to generate more income to raise the company's value as the company can earn a lot of cash by undertaking debt It means that it is necessary. Investors will not react to the rise in the company's debt level until they become excessive, the increase in the value of the company is an increase in sales