Day: February 6, 2022

The pecking order theory implies that firms prefer to finance internally and if external financing is required, they will tend to use the safest securities first. Debt tends to be the first security issued and external equity the last resort. Read More …

The theory contends that signal provided by capital structure changes are credible in providing the trend of future cash flows. Actions that increase have been associated with positive equity returns while actions that decrease leverage have been assonated with negative Read More …

The theory posts that equity holders and debt holders incur costs associated with monitoring management to ensure that it behaves in ways consistent with the firm’s contractual agreement. Regardless of who makes the monitoring express the cost is ultimately borne Read More …

It is difficult believe that a firm should have 100% debt because of tax advantage. Why don’t firm in practice borrow 100% or what is the offsetting disadvantage of debt? The offsetting disadvantage is grouped under the term financial distress. Read More …

The arbitrage process is the behavioral foundation for the M-M thesis. The shortcoming of this thesis lie in the assumption of perfect capital market in which arbitrage may fail to work and may give rise to discrepancy between the market Read More …

The Modigliani-Miller (M-M) posits that in the absence of taxes a firm’s market value and the cost of capital remain invariant to the structures changes. Assumptions The M-M hypothesis can be explained in terms of their propositions I and II Read More …