Select two of the many capital structure concepts such as Modigliani and Miller, Pecking Order Theory, leverage, and explain what each is as well as how it differs from the other concept you selected.

wo capital structure concepts are Modigliani and Miller’s (M&M) theorem and the Pecking Order Theory. The M&M theorem, also known as the “capital structure irrelevance principle”, suggests that a firm’s value is not affected by its choice of debt or equity financing. As long as a firm maintains a debt-to equity ratio that is optimal, its cost of funding will not be affected.

The Pecking Order Theory suggests that, when it comes to funding investment projects, firms prefer internal resources over external ones. According to this theory firms prefer to use their internal resources, like retained earnings, over external investors/creditors to minimize the costs of raising capital through outside sources.

The two theories differ in terms of which one provides more accurate predictions about real life scenarios; while M&M assumes perfect markets where all investors are well informed about available opportunities and no taxes exist; The Pecking Order Theory takes into account factors such as asymmetric information and taxation which make it more applicable to actual business decisions taken by companies today.