Briefly explain the assumptions under which capital structure does not matter.

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Finance

Briefly explain the assumptions under which capital structuredoes not matter.

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Assumptions under which capital structure does not matter In the MM theory the arbitrage process is made up with an assumption that personal leverage overpowers corporate leverage thus it is a finer substitute of the latter However in practical sense arbitrage process is not realistic Risk perception It is shown in the MM approach that homemade leverage is the substitute of corporate leverage In that case as far as risk is concerned it should have been identical and in such a case it would be immaterial to scrutinize whether a loan is taken by a firm or a proportionate loan is borrowed by the investor himself according to his proportion of share towards the firms debt or not If the risk is not identical then it may be said that homemade leverage is not a substitute of corporate leverage The investments in a levered firm is dissimilar with the investment in the unlevered firm and the risk is also different from this view point as in the most cases it is found that the liability of an investor See Answer

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