The purpose of the Final Project Research Paper is to examine capital structure theory, issues, and debates, while showing how capital-structure choices affect a firm’s return on investment (ROI) and its risk profile.
The structure of your research paper should include:
A preview of capital structure issues
- Business and financial risks related to capital-structure
- Modigliani and Miller’s [MM]capital-structure theory
- Criticisms of the MM model and assumptions
- Capital-structure evidence and implications
- Estimating the firm’s optimal capital-structure
A firm’s optimal capital-structure is that mix of debt and equity that maximizes the stock price. At any point in time, management has a specific target capital structure in mind, presumably the optimal one,though this target may change over time. For example, financial management may choose a 50% equity financing [stock] and 50%debt [bond] financing.
Several factors influence a firms’ capital structure, including:
- Business risk
- Tax position
- The need for financial flexibility
- Managerial conservativeness
- Growth opportunities
- Business risk is the riskiness inherent in the firm’s operations if it uses no debt.
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