in depth of debt or equity concept, helpful for MBA finance students

1. Before , academic discussion in finance was focused on : WHAT MARKET REALLY CAPITALIZED through DIV, PAT , OP or weighted combination of these? 1958 Application of tools of economics or economist’s model and assumptions Discriminating monopsony == optimal capital structure of firm Economist’s assumption are rational behavior, perfect market

2. In equilibrium, the market value of any firm must be independent of its capital structure. Arbitrage proof , can be found … Interest payments can be deducted from taxable corporate income The value of firm can be increased by the use of debt but stakeholders must incur increasing risks of bankruptcy and the costs, direct and indirect, of falling into that unhappy state. Balancing of these bankruptcy costs against the tax gains of debt finance gives rise to an optimal capital structure . In this paper, Miller has argued that even in a world in which interest payments are fully deductible in computing corporate income taxes, the value of firm, in equilibrium will still be independent of its capital structure.

7. Not end but the start of researching… THANKS