Investment, Capital Structure and Cost of Capital: Revisited

Abstract

The relevance of capital structure for a firm’s valuation is an unresolved issue (see [10], [7], [16], [4], [8], [17], [9], [15], [13], [14], and others). In a series of papers, Modigliani and Miller conclude that in a world without taxes, capital structure does not matter, but with corporate tax they reach the conclusion that the larger the proportion of debt the larger is the value of the firm (see Modigliani and Miller, [11], [12], [13]). However, Miller [10], in his presidential address has shown that under certain assumptions, with corporate and personal taxes, once again that capital structure does not matter.