Question

Structure of traditional approach in managerial economics

Answer 1

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The Traditional Theory of Capital Structure::-

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when the Weighted Average Cost of Capital (WACC) is minimized. and the market value of assets is maximized an optimal structure of capital exists.

• This is achieved by utilizing a mix of both equity and debt capital. The Traditional Theory of Capital Structure says that a firm's value increases to a certain level of debt capital.after which it tends to remain constant and eventually begins to decrease if there is too much borrowing.

• This decrease in value after the debt tipping point happens because of overleveraging. A blend of equity and debt financing can lead to a firm's optimal capital structure.

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