Capital Structure Capital Structure looks at how a firm is financed. It looks at the right hand side of a firm's balance sheet and is concerned with the mix of debt and equity that the firm utilizes to finance its assets. No personal or corporate taxes. Perfect capital markets, meaning no brokerage costs, and investors borrow at the same rate as corporations. Interest rate on all debt is the risk free rate, Rf.
All cash flows are perpetuities, meaning a zero growth rate.
Firm value is dependent not on how it is financed, but on its operations. A simple demonstration of this is provided by Brealy and Myers. Now the firm decides to lever up. You do not like this idea, but being level headed and living in a world without transaction costs or taxes, you decide you can undo what the firms has done. Thus you can undo anything the firm can do, so firm value is independent of capital structure.