The following report is about the different strategies and different models used by firms which are the key determinants behind the generation of the capital and its optimum use to maximize the strength, stability of shareholders (owner) and most important profitability of the firm as well. Initial step taken by Modigliani and Millar (1958) figure out the basics on which advanced capital structure is based upon. It is observed that business and its capital structure grew and adjust according to the state of their country. There are different rules and regulation under which the firm has to nourish and extract the margin or say profit out of it. The base of any firm is its capital structure which determines the further strategies and major steps for present and future objective. This capital structure consists of important building blocks called determinants on which the whole future and present scenario of the firm based on.
The features of a firm act upon debt-equity alternatives (gearing) which includes several parameters such as tax, financial distress and bankruptcy cost, agency cost, borrowing capacity, pecking order concept, market timing, financial slack, signalling, control, size of the firm and collateral Asset value. There are more factors but above mentioned are to be described respectively.
Factors need to be considered while choosing capital structure:
Starting from the concept of capital structure without tax:
Financial economists Modigliani and Millar in 1958 stated their concept that there is no any impact on any firm due to its debt-equity ratio. Behind this concept they assume that there is no taxation, having perfect information available, clear cut risk for everyone, no financial distress cost around at all. It means firms‟ market value have no any relation to its capital structure rather the generation of its value is depends upon the strategic investment. After a while they... [continues]
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