Existing theories of corporate financial structure were developed with the view of maximizing market value of the firm. In this thesis, however, a theory is developed with the view of maximizing corporate utility obtained by combining personal utilities. According to this corporate utility model, optimal financial structure is not determined as a unique equity-debt ratio, but as an interval, and four hypotheses obtained from this model are equivalene to those of others.
The four hypotheses are :
1. Different industrial classes yield different intervals of corporate equity-debt ratios.
2. The size of a firm is positively related to its use of debt capital.
3. There is a negative relationship between business risk and financial leverage.
4. The operating leverage is negatively related to the financial leverage.
These hypotheses are tested with the recent data of Korean firms ; hypotheses 1, 2 and 4 are accepted, whereas hypothesis 3 is rejected.
The corporate utility model can be used as a means of corporate decision making about debt financing, and of a sensitivity analysis for the optimal equitydebt ratio when the environments of the firm, i.e., industrial class, size, etc., are changed.
