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BRILLIANT’S Capital Structure Theories 355

share capital. Modigliani and Miller, therefore H¡${nQ>b go H$moB© g§~§Y Zht h¡ Am¡a H$ånZr H$s gånyU©
argued that leverage has nothing to do with H$m°ñQ> go H¡${nQ>b H$s gånyU© H$m°ñQ>, ZoQ> Bp³dQ>r H$s
the overall cost of capital and the overall cost
of capital of a company is equal to the capitali- H¡${nQ>cmBOoeZ aoQ> Ho$ ~am~a hmoVr h¡Ÿ& AV… brdaoO H$m
zation rate of pure equity. Hence leverage has eo¶g© Ho$ ~mOma _yë` Ed§ H¡${nQ>b H$s H$m°ñQ> na H$moB©
no impact on share market prices nor on the à^md Zht ahoJmŸ&
cost of capital.
Assumptions _mÝ`VmE§
Modigliani and Miller is based upon a _mo{X½bmZr-{_ba H$s Cnamoº$ AdYmaUm Hw$N> _mÝ`VmAm|
number of assumptions, which are as under: na AmYm[aV h¡, Omo {ZåZ{b{IV h¢:
(i) It is assumed that capital market is perfect. (i) `h _mZm J`m h¡ {H$ H¡${nQ>b ‘mH}$Q> nyU© h¡ AWm©V²
BÝdoñQ>g© H$mo H¡${nQ>b ‘mH}$Q> H$m nyU© kmZ h¡Ÿ&
(ii) Information is perfect and readily avail- (ii) BÝdoñQ>g© Ho$ nmg g^r gyMZmE§ CnbãY h¢Ÿ&
able to the investors. (iii) BÝdoñQ>g© ~w{Õ_mZ h¢ d EH$ {g³¶y[aQ>rO go Xygar
(iii) Investors are rational and can easily move {g³¶y[aQ>rO H$s Amoa VwaÝV AJ«ga hmo OmVo h¢Ÿ&
from one security to another.
(iv) It is also assumed that the various firms (iv) `h ^r _mZm J`m h¡ {H$ ~mOma _| {d{^Þ \$_] AnZr
in the market can be classified according Omo{I_ Ho$ ñVa Ho$ AmYma na dJr©H¥$V hmo OmVr h¢Ÿ&
to the degree or risk.
(v) In the original formulation of their hypot- (v) AnZr _yb AdYmaUm _| _mo{X½bmZr-{_ba Zo H$m°nm}aoQ>
hesis, MM assumes that no corporate BÝH$_ Q>¡Šg H$mo Ü`mZ _| Zht aImŸ&
income-tax exists.
Y

K 0 (%) V

V 0 X
Degree of Leverage (B/V)
K 0
Fig.: Leverage and Cost of Capital (MM Approach)
It may be concluded that the controversy {ZîH$f© Ho$ ê$n _| H$hm Om gH$Vm h¡ {H$ Q´>o{S>eZb
between the traditionalists and the supporters AdYmaUm Ed§ _mo{X½bmZr-{_ba H$s AdYmaUm Ho$ AÝVa
of Modigliani and Miller approach cannot be re- H$mo hb H$aZo H$m H$moB© VH©$nyU© AmYma CnbãY Zht h¡Ÿ&
solved due to lack of empirical research. Tradi- Q´>o{S>eZb AdYmaUm VH©$ XoVr h¡ {H$ brdaoO H$m C{MV T>§J
tionalist argue that the cost of capital of a firm go Cn`moJ H$aHo$ H$m°ñQ> Am°’$ H¡${nQ>b H$mo H$_ {H$`m Om
can be lowered and the market value of the shares
can be increased by a careful use of leverage. gH$Vm h¡ VWm H$ånZr H$s _mH}$Q> d¡ë`y H$mo ~‹T>m`m Om
However, after a certain stage, as the company gH$Vm h¡Ÿ& `Ú{n EH$ {Z{íMV gr_m Ho$ ~mX, O~ H$ånZr
becomes highly geared, it becomes too risky for na brdaoO H$m ^ma ~‹T> OmVm h¡ Vmo Omo{I_ ~‹T>Zo Ho$ gmW-