Traditional capital structure theory

Under the traditional view, replacing some equity with lower-cost debt can initially reduce the weighted average cost of capital. Beyond a point, rising financial risk causes equity and eventually debt providers to require higher returns, producing a minimum-WACC capital structure. This is a conceptual account rather than a universal numerical rule. The optimum depends on assumptions and business conditions and cannot be found by simply maximising debt. Compare it with Modigliani–Miller propositions and real-world taxes, distress costs, agency issues and financing flexibility.