... firm value decreasing. We will use this case study throughout to help us discover if this capital structure "golden rule" exists. The major breakthrough in capital structuring theory came with Modigliani and Miller's propositions in 1958. When they first looked at whether or not there was an optimal capital structure they based their conclusions on a number of strong implicit and explicit assumptions: symmetric information exists between investors and managers; managers are unselfish; debt is risk free; corporate taxes do not exist. Based on these assumptions, they concluded that firm value was unaffected by its leverage and that investment and financing decisions could be separated. Modigliani and Miller first looked at the effects of differing levels of debt on the cost of capital. As MM assumed that debt was risk free this meant the cost of debt was the same as the risk free rate of the market. If debt is ...

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