• 7. Towards an Optimal Capital Structure

    In this last section of the module, we conclude the discussion of the debt-equity trade-off. We start by discussing possible additional costs and benefits of debt financing, namely: 

     

    debt-equity trade-off

      

    Then we turn to the question of how these considerations shape the optimal financing policy. To this end, we discuss the two most important theories of capital structure, namely the Pecking-Order Theory as well as the Trade-off Theory. We conclude the section with an illustration of how we can use Monte Carlo Simulation to determine a firm's optimal leverage range.

6. Understanding and Valuing Debt and Equity