CHAPTER 12

Capital Structure Theory and Policy

LEARNING OBJECTIVES

  • Explain the theories of the relationship between capital structure and value of the firm
  • Highlight the differences between the Modigliani-Miller view and the traditional view on the relationship between capital structure, cost of capital and the value of the firm
  • Explain the interest tax shield advantage of debt as well as its disadvantage in terms of costs of financial distress
  • Discuss the pecking order theory of capital structure
  • Describe the determinants of capital structure in practice.
INTRODUCTION

In Chapter 11, we discussed the effect of leverage on the shareholders’ earnings and risk. Under favourable economic conditions, the earnings per share increase with financial ...

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