The objective of capital structure management is to mix the permanent sources of funds used by the firm in a manner that will maximize the company's common stock price. Alternatively , this objective may be viewed as a search for the funds mix that will minimize the firm's composite cost of capital.
Debt financing is not as cheap as it first appears to be. This will keep the composite cost of funds constant.
The implication for management is that one capital structure is as good as any other; financial officers should not waste time searching for an optimal capital structure. One capital structure, after all, is as beneficial as any other, because all result in the same weighted cost of capital.
Extreme Position 2: Dependence Hypothesis (NI Theory)
The dependence hypothesis is at the opposite pole from the independence hypothesis. It suggests that both the weighted cost of capital, K o , and common stock price , P o , are affected by the firm's use of financial leverage.
The firm's cost of capital, K 0 , will decline as the debt-to-equity ratio increases.
This also implies that the company's common stock price will rise with increased leverage use. Because the cost of capital decreases continuously with leverage, the firm should use as much leverage as is possible.