Gearing up for debt
With debt spiralling out of control for many corporates, Professor DR Myddleton looks at how different theories of debt have influenced companies’ approach to their business
The theory of capital structure is often regarded as starting with Modigliani and Miller in 1958. They show that, under certain ‘perfect’ conditions, a firm’s market value is independent of its capital structure. Modigliani and Miller’s assumptions may be unrealistic, but they suggest where to look for relevant ‘imperfections’ (two of which – inflation and tax – stem from governments).
Most textbooks still describe optimal capital structure as a trade-off between the tax benefits of debt and the
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