What does capital structure theory attempt to do? What lessons can be learned from capital structure theory? Be sure to address the MM models. See: Case Study

MM theory begins with the assumption of zero taxes. MM prove, under a very restrictive set of assumptions, that a firm’s value is unaffected by its financing mix:
MM theory begins with the assumption of zero taxes. MM prove, under a very restrictive set of assumptions, that a firm’s value is unaffected by its financing mix:
VL = VU.
Therefore, capital structure is irrelevant. Any increase in roe resulting from financial leverage is exactly offset by the increase in risk (i.e., rs), so WACC is constant.
MM theory later includes corporate taxes. Corporate tax laws favor debt financing over equity financing. With corporate taxes, the benefits of financial leverage exceed the risks because more EBIT goes to investors and less to taxes when leverage is used. MM show that:
VL = VU + TD.
If T=40%, then every dollar of debt adds 40 cents of extra value to firm.
Miller later included personal taxes. Personal taxes lessen the advantage of corporate debt. Corporate taxes favor debt financing since corporations can deduct...