capital structure and payout policy

• MM proposition 1 without tax:

  • in a perfect market, the value of a firm is independent of its capital structure
• MM dividend irrelevance theory:

  • in perfect world, value of firm with fixed investment policy is independent of dividend policy
• despite the tax benefit of debt being tax-deductible, the debt ratio in firms is relatively low
• it is unknown why firms choose to not use debt, despite debt offering a tax shield