The capital structure is the composition of liabilities. The firm level calculations usually encompass the equity finance and debt finances and the ratio of the debt to financing. In this, the debt financed statute is found to firm leverage. The capital structure is found to be a highly complex and it includes a number of sources for the collection of the capital. The leverage can be defined as the proportion of the firm capital that is obtained from the debt. This is found to be highly complex. In cases of bankruptcy the capital structure of is divided from the senior most position to the least (Leary, and Roberts, 2005).
In the perfect capital market, there is no transaction or bankruptcy cost. Firms and individual is found to borrow the same interest rate. There are no taxes and investment returns are not impacted by the financial uncertainty. Modigliani and Miller derived two main findings in these conditions (Modigliani, & Miller, 1965). The first proposition that was considered is that the value of the company is found to be independent of the capital structure. The second proposition is that the cost of equity of the leveraged firm is equal to the cost of equity of the unleveraged firm. The risk is found to be shifted between the investor classes. There is no extra value is created. The optimal structure is found to have no equity at all. The capital structure is found to consist of 99% of the debt. In the real world, this capital structure bears no relevance (Leary, and Roberts, 2005).