© 2000 John Petroff

E- Theoretical optimal debt and equity mix

A good way of getting the most out of financial leverage while avoiding default potential would be to determine an optimum debt limit beyond which a firm should not borrow. We look at two very different methods of conceptualizing such optimum: one is mathematical, and the other studies a company's historical development. In contrast to these, Merton Miller and Franco Modigliani prove that there is no optimum, and that corporate capital structures does not matter to investors (under some restrictive assumptions).