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How does a practitioner use the theory to determine

optimal capital structure? The answer to this question


is the Holy Grail of corporate finance.
The theory of capital structure is critical because the
financing mix of a company can have significant effects
on it (Myers, 2001). If wealth could be enhanced by
getting the leverage decision right, managers need to
understand the key influences. Its actual relevance and
the consequences on a business have been questioned
in past research (Modigliani and Miller, 1958) but more
recent empirical evidence clearly points out that capital
structure does matter (Myers and Majluf, 1984).

Capital Structure
Capital structure refers to the
sources of financing, particularly the
proportions of debt
(leverage/gearing) and equity that a
business uses to fund its assets,
operations and future growth