Everything you need to know about the theories of capital structure. Capital structure theories seek to explain the relationship between capital structure decision and the market value of the firm. There are conflicting opinions regarding whether or not capital structure decision (or leverage or proportion of debt and equity) affects the value of the firm (or shareholder’s wealth). The value of the firm depends on two basic factors i.e. the earnings of & the cost of capital.

KEYWORDS: Capital Structure Theories, Cost of Capital, Shareholder’s Wealth, Debt and Equity.