Please describe how changes in capital structure affect the value of the firm in a world...

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Finance

Please describe how changes in capital structure affect thevalue of the firm in a world with taxes and including the possiblecosts of financial distress. Is there an optimal capital structurefor a firm? Please discuss. Electric utilities have an average 60%debt/total capitalization ratio whereas software firms have debtratios close to zero. Why? Please explain the dividend policy thatyou would advise for a tech company to adopt that has very highbusiness risk. How do you financially evaluate an acquisition

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Answer The changes in capital structure that affect the value of the firm with taxes can be explained by Modigliani and Merton Miller MM proposition This MM proposition with taxes can be arrived under the consideration that in most countries interest expense are a pretax expense and are therefore tax deductible whereas the dividends are paid on an after tax basisThe difference in tax treatment encourages the firms to use debt financing as the debt provides the tax shield that increases the value of the company The tax shield can be calculated by See Answer

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