General Studies · Capital Structure

Analyze the seven statements below regarding the theories and practices of Capital Structure: 1. A highly levered firm amplifies equity returns during growth, but increases financial breakeven and reduces margin of safety during downturns. 2. Optimal capital structure occurs where the marginal benefit of the debt tax shield equals the marginal cost of financial distress (direct & indirect). 3. The traditional approach proposes an optimal capital structure maximizing firm value, contradicting the Modigliani-Miller theorem under perfect markets. 4. Under MM Proposition II with taxes, WACC declines as cheap debt is added because the interest tax shield lowers the effective cost of debt. 5. Book value weights for WACC are criticized as they reflect historical costs rather than current opportunity costs required by investors. 6. Debt financing can reduce agency costs by limiting free cash flows available to managers for non-value-adding activities. 7. In India, promoter-driven companies often prefer debt to avoid dilution of control, even if it deviates from theoretical WACC optimization. What is the correct status of these statements?