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CAPITAL STRUCTURE THEORY - 1.TradeoffTheory Beganin1958...

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    CAPITAL STRUCTURE THEORY   1.Trade-off Theory            -Modern  Capital Structure Theory            -Began in 1958          - F. Modiglini & M. Miller (MM)     Assumptions   - No personal Income Tax, No Brokerage Cost,  - No Bankruptcy Risk   - Interest on debt is a tax deductible  -  Corporation may use more debt   - Firm value may increase   - May maximize by using almost 100% debt   - Several Assumptions were & are unrealistic    - MM Beginning   - MM themselves Extended the theory   - Assumptions Relaxed   - Stocks price and Capital Structure   - Optimum Capital Structure
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    Extended Assumptions (1)Debt interest tax deductible      -Common Stock, Preferred Stock  -cost more      -Debt more  -  Value high (2) MM Assumptions do not hold in real world   i) Debt/Assets Ratio increase  - Interest    Increase   ii) Expected tax rates fall at high debt level   iii) Bankruptcy cost – probability – law charges 
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