According to Michael Milken, since 1974, there has been a tremendous growth in the accessibility of capital markets . The capital structure according to Merton Miller was not crucial in valuing the securities of a company or even the risk involved while investing in them. There is a constant evolvement of the optimal capital structure, and any successful corporate leader should take into consideration some factors. These factors are social trends, government regulation, the economy, the market capital state, industry dynamics, and the company with its management. These six factors are extremely crucial, and if they are indicating a rise in business risk, a dollar debt may even be extremely much for some companies to handle and try to manage.
A stock value can be depressed by issuing a new equity, and can be possible in two ways: signaling that the management to think that there is a high stock price relative to the true value. The big decision on whether to decrease or increase leverage greatly depends on the condition in which the market is in, and the investor’s debt receptivity.
The capital structure trade -off theory is an idea chosen by a company on how much equity finance, and how much debt to use through balancing of benefits and costs. The article has provided basis to this theory and some examples provided. The article shows that in 1975 when companies that had good spreadsheets started to improve, they developed a strong capital structure, and started acquiring other corporations. This was possible due to the fact that the perceived benefit was more as compared to the cost, and also the availability of finance. Although some instances in the article have been outline where some companies made some wrong decision and went against the trade-off theory, there were consequences which adversely affected these companies.
Works cited
Michael milken Why Capital Structure Matters , 1974.
