Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory

Abstract

Under condition of proved by us insolvency of well-known classical trade off theory it becomes important to identify mechanisms for forming the optimal capital structure of a company. This paper presents one of the real such mechanisms based on the decrease of debt cost with leverage, which is determined by growth of debt volume. This mechanism is absent in perpetuity Modigliani-Miller theory, even in modified version, developed by us, and exists within more general modern theory of capital cost and capital structure by Brusov-Filatova-Orekhova, or BFO theory.