Question: (b) In finance, the most debatable topic is capital structure. The main issue of debate revolves around the optimal capital structure. There are two

(b) "In finance, the most debatable topic is capital structure. The main

(b) "In finance, the most debatable topic is capital structure. The main issue of debate revolves around the optimal capital structure. There are two schools of thought in this regard. One school pleads for optimal capital structure and other does against it. Former school argues that judicious mixture of debt and equity capital can minimize the overall cost of capital and maximize the value of the firm. Hence, this school considers capital structure decision as relevant. Latter school of thought led by Modigliani and Miller contends that financing decision does not affect the value of the firm. Since value of the firm depends on the underlying profitability and risk of investment (Van Horne 2002)." 4| Page Critically evaluate the above quotation in the light of the overwhelming research evidence of capital structure theory.

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