The Modigliani–Miller theorem (1958) is the foundation of modern capital structure theory. It states that when markets are perfect, the capital structure of a company does not matter. This chapter provides a review of this proposition and explains that capital structure choice is important when taxes are considered. By increasing the amount of debt in its capital structure, the firm creates a “debt tax shield” that can decrease the amount of taxes and increase the firm’s value. Increasing debt in a firm’s capital structure increases its probability of bankruptcy. Since bankruptcy is costly, the incentive to increase debt should depend on potential bankruptcy costs. The Trade-off theory of capital structure, which combines the debt tax shield and the expected bankruptcy cost ideas, is explained, and a review of recent literature is provided.