Capital structure and firm value Literature review

Capital anatomical structure and unfaltering value - lit review ExampleFinally, the relationship between various aspects like credit ratings, target leverage, short marge financing etc and their influence on the firms financing policy have also been discussed. intromission The monetary managers of a comp some(prenominal) work towards achieving an optimal great mix. In large companies there is a separate financial department that takes care of financing issues. The managers strive hard to achieve a mightily mix of debt and right as the heavy(p) base of the firm determines the cost of hood. The point at which the bonny cost of capital is minimum, the value of the firm is maximum. This point is referred as optimal. Methodology The choice of capital structure and firm value is an important topic in financial literature. This paper examines various capital structure theories like pecking order, trade-off surmise etc and its impact on capital structure decisions. Mostly, the se condary sources of entropy have been used to determine the relationship between the capital structure of the firm and its value. ... The significant components of the capital structure include both debt and equity. Back in the year 1958, Modigliani and Miller had established the modern speculation of capital structure. correspond to this theory, the value of a firm does not depend on its capital structure decisions. The Modigliani-Miller theorem is a significant arena of contemporary corporate finance. At its centre, the theory refers to an irrelevance proposition. The Modigliani Miller theory offers cases chthonic which the financial decision of a firm does not have an effect on its value. According to the theorem, with well-functioning markets ... and rational investors, who can undo the corporate financial structure by holding positive or negative amounts of debt, the market value of the firm debt plus equity depends only on the income stream generated by its assets (Villam il, n.d., p.1). As per Modigliani, the firm value should not be dependent on the portion of debt within the financial structure. The Modigliani Miller theorem is comprised of four separate results which are fetched from a series of research papers. According to the world-class proposition, under some specific conditions, the debt-equity ratio of the firm would not have an impact on the market value. Among them, the first two are related to the firms capital structure. As per the second proposition, the leverage of any firm would not have any effect on the firms weighted amount cost of capital. This means that cost of equity has a linear relationship with the firms debt equity ratio. Miller has given an example for a better understanding of the theorem. For an instance, one can think that the firm is a huge tub of