27 entirely financed with debt. Results of the study Professor Modigliani and Miller
irrelevant also depends on the assumption that there are no bankruptcy costs. However, in practice, the cost of bankruptcy can be very expensive.
Bankrupt company has legal and accounting costs are very high, and difficult to retain customers, suppliers and employees. According to Brigham 2014: 71, a
bankruptcy-related problems tend to arise when companies use more debt in their capital structure.
If the cost of bankruptcy increasingly large, profit levels required by shareholders is also higher. Debt capital costs will also be higher because the
lender will charge a higher interest rate to compensate for the increase in the risk of bankruptcy. Therefore, the company will continue to use debt if the benefits
payable tax savings from debt is still greater than the cost of bankruptcy. If the cost of bankruptcy is greater than the tax savings from debt, the company will
reduce its debt level. The level of debt that is optimal, thus the optimal capital, occurred when the additional tax savings equal to the additional cost of
bankruptcy.
d. Pecking Order Theory
This theory is called pecking order because this theory explains why the company will determine the hierarchy of sources of funds are the most preferred.
In summary, according to Brigham 2014: 73 The theory states that: Companies like Internal financing financing of the companys operating result.
The company tries to adjust the ratio of the distribution of dividends targeted to try to avoid drastic changes in dividend payments.
28 If external funding external financing Is required, the company will issue
a securities most safe first, beginning with the issuance of bonds, followed by securities were characterized options such as convertible bonds, new end if still
insufficient, the new shares issued. Implication pecking order theory is the company does not establish an optimal capital structure, but the company
established a policy priority funding sources. Pecking order theory explain why firms profitable favorable generally borrow in small amounts. This is not
because the company has the target debt ratio Low, but because it requires external financing slightly.
While companies lacking profitable tend to have larger debt because not enough internal funds and external debt is the preferred source. The use of
external funds in the form of preferred debt than equity capital for two reasons; first, consideration of the cost of emissions where the cost of bond issuance will
be cheaper than the cost of new stock issuance. This is due to the issuance of new shares will lower the price of the old shares. Second, managers worry issuance of
new shares will be interpreted as bad news by investors, and the stock prices will go down, this is caused partly by the possibility of inequality of information
between management and the investors.
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e. The Trade off Model
According to Gitman 2012: 88, models trade-offs Assuming that the companys capital structure is the result trade-offs of the tax advantage by using
debt at a cost that would result from the use of the debt. Essence the trade-off theory the capital structure is balancing the benefits and sacrifices that arise as a
result of the use of debt. As far greater benefits, additional debt is allowed. If the sacrifice for a greater use of debt already, then the additional debt is not allowed.
The conclusion is the use of debt will increase, but only on the value of the company up to a certain point. After that point, the use of debt actually reduce the
value of the company. Although models the trade-off theory can not accurately determine the optimal capital structure, but the model provides an important
contribution, namely; a Companies that have high assets, you should use less debt.
b Companies that pay high taxes should be more use of debt than companies that pay low taxes.
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f. Agency Theory
