element assumption was changed for the capital structure classical proposition. The corporate income tax was integrated by them and they argued that the levered firm value is equivalent to the unlevered firm value along with the obtained tax benefit value. Interest over debt has deductibility of tax . This in turn provides companies with incentivizes for issuing debt. According to Modigliani and Miller (1964), the model for tax depicts that firms can enhance their value through use of as much debt as there is a possibility . Due to the assumed market with perfect capital, the agency and bankruptcy debt costs can be ignored as per Modigliani and Miller. Debt related agency and bankruptcy related debt costs. Debt related agency and bankruptcy prices might overweigh the benefits of tax within a much oriented setting in realistic domain. Due to such costs, there is a trading off between debt and equity. This suggests that there is certain debt related threshold level. There also is a specific debt amount with which the value of firm can have maximization (Almeida, Campello and Weisbach, 2004). According to Jensen and Meckling (1976), 2 types of agency and its conflict can be identified which incurs costs with conflicts between shareholders, managers as well as conflicts between shareholders and also bond holders.
These are the direct costs and also involve indirect costs related with the provision of bankruptcy. The direct prices are inclusive of legal fees as well as time spent by managerial level within the bankruptcy of administering. The indirect prices are inclusive of a possible firm inability for obtaining credit or for issuing any form of security as well as a sales loss because of doubt and fear from consumers and also suppliers (Hodson et al., 2009). As an organization enhances with regard to its debt, the price to financing the debt becomes high as the debt starts becoming riskier towards investment makers. When an organization starts going bankrupt, holders of debt have higher chance to lose part or all of their investments and this asks henceforth a higher return rate (Allen and Santomero 1998). This higher capital costs in turn can lead towards distress of financial nature. This occurs when creditors are promised with honour or broken preference with issues.