Problem: Does the overall economic situation effect the above? Does a higher debt to equity ratio lead to higher market value and return on equity?

Purpose: The purpose of this thesis is to get an understanding of how a company’s level of debt affects its value and return depending on the overall economic business cycle, and if an investor can use this information when choosing investments.

Methodology: This thesis takes a deductive research approach. We have used quantifiable data and with the use of statistical techniques such as correlation and regression analysis to try and prove our assumptions.

Theory: The Modigliani and Miller theorem regarding taxes states that companies with more debt have higher value. The tradeoff theory on the other hand describes debt as something positive but only up to a specific level. And finally the leverage formula and CAPM states that the return and risk for a specific company increases as they obtain more debt.

Conclusions: The positive effect of debt does not exist. It rather has a negative effect on companies varying by industry. And economic booms and busts have an impact on how strong that effect is.