Chapter 1: Introduction
1.1 Background information:
Initiating with the chain of operating cash flows, the company is required to utilize their assets in the business and whenever the company become able to pay their taxes, they started to provide money to their investors as dividend and to retain balance for their business by means of reserved incomes. If the corporation is financed through equity then all the income of the firms starts to flow towards the investors throughout as sort of reserved incomes but if the enterprise is financed through debts then company has to pay some portion of their income for the purpose of paying these debts. As the debt holders are having priority on the company’s cash flows so they are only authorized to…show more content… According to them, for any company the earning power of their real asset is their market values and if the assumption of company’s having fixed capital investments and some other assumptions are fulfilled then there is no relation between the company’s capital structure choice and the market values. After the publication of Modigliani and Miller’s irrelevance capital structure theory, everyone has started to focus on their assumptions of no taxes, bankruptcy cost and the imperfections of the real world because they had impact on the company’s selection of investment framework and its total current market worth. Corporate leverage significance was shown in that paper which is seen in the financial press during 1970s where the leverage was significantly increased. Moreover, the choice of capital structure impact on the market value can be further…show more content… But according to the financial specialists, if the leverage of company is maximized i.e. by maximizing the debt portion in company capital structure it will maximize the value up to a certain level and if it is maximized further, it will maximize the company’s total capital cost and at the same it minimize the total market value. But the Modigliani and Miller have taken some other assumptions also which includes the tax absence, bankruptcy cost and the imperfections of the world. Due to these assumptions, capital structure choice of the company is having impact on the total market value. Corporate leverage significance is shown in this paper which is seen in the financial press during 1970s where the leverage was significantly increased. Moreover, the choice of capital structure impact on the market value can be further