MANAGEMENT

Detailed explanation-1: -This theory, also known as fixed Cost of Equity (ke) theory, was propounded by David Durand. The theory works like this: “As the proposition of cheaper debt funds in the capital structure increases, the weighted average cost of capital decreases and approaches the cost of debt".

Detailed explanation-2: -Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.

Detailed explanation-3: -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-4: -What Is the Modigliani-Miller Theorem (M&M)? The Modigliani-Miller theorem (M&M) states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure.

Detailed explanation-5: -As per Net Income Approach, there is a relationship between capital structure and value of the firm and therefore firm can affect its value by increasing or decreasing the debt proportion in the overall financing mix. This approach shows that capital structure has relevance in determining the value of firm.