BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -Also known as the irrelevant theory, it was also postulated by David Durand. It depicts that the company’s market value is not affected by changes in the capital structure. The overall cost of equity can remain fixed no matter the proportion of debt.

Detailed explanation-2: -Therefore, Gross Profit Method is not an approach to the Capital Structure.

Detailed explanation-3: -Modigliani and Miller’s Approach According to Modigliani and Miller, value is independent of the method of financing used and a company’s investments. The M&M theorem made two propositions: Proposition I: This proposition says that the capital structure is irrelevant to the value of a firm.

Detailed explanation-4: -The traditional theory of capital structure says that a firm’s value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease if there is too much borrowing. This decrease in value after the debt tipping point happens because of overleveraging.

Detailed explanation-5: -Miller and Modigliani’s dividend irrelevance theory is sometimes known as the homemade dividend theory. It suggests that a shareholder can earn as much money as in the case of dividend by selling the shares in the market. Hence, the investors are indifferent to the dividend distribution policy of a company.