In 1958 an academic paper on corporate finance written by two
professors (Merton Miller and Frances Modigliani, who were later
awarded the Nobel prize for their research efforts) was published
in The American Economic Review. One prime conclusion of their
paper was that the exact form of a firm's capital structure did not
affect the firm's value. Later papers by the same two authors and
by many others modified the assumptions and changed this
conclusion. We now think that capital structure decisions do affect
a firm's value and corporate managers should understand better the
financing alternatives that are available. One of the most
important financial decisions is the decision to buy or lease
assets. The leasing industry is large and getting larger.
Unfortunately, it is very easy for a firm to evaluate incorrectly
lease alternatives (see Chapter 12). The capital structure decision
is one of the three most important financial decisions that
management make (the distribution of earnings and the capital
budgeting decisions are the other two contenders). Managers should
increase their understanding of capital structure alternatives and
remember that choosing the best capital structure is an art and not
an exact simple calculation. But applying the art can be improved
with understanding.
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