The purpose of the Final Project Research Paper is to examine capital structure theory, issues, and debates, while showing how capital-structure choices affect a firm’s return on investment (ROI) and its risk profile.

The structure of your research paper should include:

A preview of capital structure issues

  • Business and financial risks related to capital-structure
  •  Modigliani and Miller’s [MM]capital-structure theory
  •  Criticisms of the MM model and assumptions
  •  Capital-structure evidence and implications
  •  Estimating the firm’s optimal capital-structure
    A firm’s optimal capital-structure is that mix of debt and equity that maximizes the stock price. At any point in time, management has a specific target capital structure in mind, presumably the optimal one,though this target may change over time. For example, financial management may choose a 50% equity financing [stock] and 50%debt [bond] financing.

Several factors influence a firms’ capital structure, including:

  •  Business risk
  • Tax position
  •  The need for financial flexibility
  •  Managerial conservativeness
  • Growth opportunities
  • Business risk is the riskiness inherent in the firm’s operations if it uses no debt.

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