Capital Structure Comparison Essay by writingsensation

This paper presents an overview of several different theories of corporate capital structure, focusing particularly on the differences between the traditionalist view of capital structure and the Modigliani-Miller view. The paper points out that there are two major differences between the traditionalist view of corporate capital structure and the Modigliani-Miller view, explaining that the first difference lay in the traditional view's contention that the value and cost of capital of a firm is interrelated to its capital structure, whereas the Modigliani-Miller view contends that they are independent of each other. The paper next explains that the second major difference is that the Modigliani-Miller view indicates a linear relationship between shareholder rate of return and firm leverage, which means that at low levels of debt the cost of equity increases faster under the Modigliani-Miller theorem than it does under the traditional View. The paper also takes a look at several other modern theories of corporate capital structure and investigates how these theories differ from the Modigliani-Miller view.