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1.Capital structure A capital structure refers to the way a corporation finances its assets through the mix of equity, debt or hybrid securities. The optimal capital structure is the one in which, the market value of the firm is maximized when its cost of capital is minimized. The firm should adopt the EPS- EBIT approach to the capital structure. This approach involves selecting the capital structure that maximizes EPS (Earnings per share) over the expected range of EBIT (Earnings before interest and tax). In this approach, the main emphasis is laid upon the owner’s return that is the earning’s per share. A big disadvantage of this approach is the fact that the earnings are only one of the determinants of shareholder wealth maximization. This method also ignores the impact of risk. Another shortcoming is that it doesn’t maximize the shareholder’s wealth because it fails to consider the risk.
2. Modigliani Miller (MM) Proposition 1 The Modigliani Miller (MM) Proposition 1: The proposition indicates that a change in the business capital structure does not necessarily change the total value of the business. In other words, a business can make a choice to finance its operations either by debt or by distribution of shares. The value of a firm is independent of the capital structure of the firm under certain assumptions. The assumptions are as under- The capital structure does not matter if the investment opportunities are given and there are homogeneous expectations about the opportunities in the firm. Another assumption is that there are no bankruptcy costs, no taxes and no cost of issuing the debt securities (Moles 2011). The expected rate of return on the stock of a leveraged firm increases in proportion to the debt equity ratio. When the leverage value of a firm increases then the market value and the present value of tax saving

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