Assignment on AFM - Introduction

Running head: AFM Assignment
AFM Assignment
Name of the Student
Name of the University
Author Note

1
AFM Assignment
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Conclusion..................................................................................................................................5
References..................................................................................................................................6

2
AFM Assignment
Introduction
In the history of capital structure theory, the M & M model does have the realistic
assumptions, which has been related to the market fictions and the set of information, which
are related to the managers and shareholders. It is one of the influentialeconomic theory, that
does form the basis of the modern thinking upon the capital structure. Upon this theory, it
does advocate to the capital structure irrelevancy theory.
Discussion
The capital structure of organization is the way through which the entity can finance
its assets. The organization can finance its operations through the way of equity or by the
different combination of debt and equity. In any capital structure of an organization, it does
have the majority of debt that has been seen, or else it can be seen that there has been
majority of equity or it can be mix of both (Haq et al. 2018). It does not matter what the
capital structure an organization uses in financing the operations, there is hypnotized in the
perfect markets. The market value of firm is usually being determined by the earning power
and there is also another factor that also determines is the risk of underlying assets and the
value in which it is independent in choosing the finance for investments to dividends(Chen,
Harford and Kamara 2019).
As per the M & M capital structure model, there is an irrelevancy proposition which
has been assumed as there are no taxes also no cost of bankruptcy. In this the working capital
cost of capital will remain stable as there are certain changes in the organization’s capital
structure. There are also no changes or benefits upon the increase of the debt, the capital
structure will not influence the stock price of organization and thus the capital structure is not