[Verse 1] Modigliani-Miller built a perfect world Where capital structure doesn't matter, value's unfurled No taxes, no friction, just pure theory's dance Debt or equity - firm value stays the same stance But add some taxes to this pristine scene Interest deductions make debt look keen Tax shield benefits boost the worth Corporate borrowing gains more girth [Chorus] M-M perfect, then add tax shield Trade-off theory makes the balance real Pecking order says retained comes first Agency costs can make things worse Target structure, covenants bind Capital choices occupy the mind [Verse 2] Financial distress creeps in when leverage climbs Bankruptcy whispers, restructuring chimes Trade-off theory weighs the scales so neat Tax benefits versus distress costs compete There's an optimal point where value peaks Beyond that spot, destruction seeks Sweet equilibrium, debt's golden zone Where tax shields shine but risks aren't overblown [Chorus] M-M perfect, then add tax shield Trade-off theory makes the balance real Pecking order says retained comes first Agency costs can make things worse Target structure, covenants bind Capital choices occupy the mind [Bridge] Pecking order climbs the funding tree Internal cash flows, debt, then equity Myers said managers guard inside truth Information asymmetry, that's the proof Equity signals overvaluation's curse So debt comes second, equity comes last in verse [Verse 3] Agency battles wage between the sides Debt holders, shareholders with different rides Moral hazard tempts the equity crew Risk-shifting games and asset substitution too Debt covenants tighten management's rein Financial ratios, investment constraints maintain Monitoring costs and bonding fees arise When interests clash, trust slowly dies [Chorus] M-M perfect, then add tax shield Trade-off theory makes the balance real Pecking order says retained comes first Agency costs can make things worse Target structure, covenants bind Capital choices occupy the mind [Outro] Target ratios guide the corporate quest Industry benchmarks suggest what's best Flexibility matters, timing's key Capital structure shapes what firms can be
← Post-Audit of Capital Projects | Capital Structure Basics →