The study of capital structure is considered one of the fundamental topics in financial management because it helps institutions determine the best mix of funding sources to achieve a balance between risks and returns, and to increase the value of the institution.
In this context, several financial theories have emerged attempting to explain the relationship between debt ratio, cost of capital, and firm value.
In this lecture, we will focus on two main theories:
- Net Income Theory
- Operating Income Theory
We will review the basic assumptions of each theory, how the debt ratio affects cost of capital and firm value, and the strengths and weaknesses of each.
- Enseignant: Nadia Zouggaret