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Some theorist thinks that in a world of no taxes the debt to equity ratio doesn’t matter, if the objective of firm is to maximise the wealth. But, these theorists argue that in a world with tax, it is best to ‘leverage-up’ a company as high as probable. However in practice this latter argument doesn’t hold good as there are limits to the debt level which company can bear.


Illustrate the theoretical arguments of Capital Structure Decision in the World with Tax and describe the real-world influences on financial leverage of firms.

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