1. Capital structure decisions and firm value Aa Aa Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock, and common equity capital) and is often presented as a percentage of the type of financing used. As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure. Which of the following statements regarding a firm's optimal capital structure is true? The optimal capital structure maximizes the firm's cost of debt. The optimal capital structure minimizes the firm's weighted average cost of capital. The optimal capital structure maximizes the firm's earnings per share (EPS). The optimal capital structure maximizes the firm's cost of equity. Understanding the impact of debt in the capital structure Suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the list and identify which items are correct. Check all that apply.
1. Capital structure decisions and firm value Aa Aa Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock, and common equity capital) and is often presented as a percentage of the type of financing used. As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure. Which of the following statements regarding a firm's optimal capital structure is true? The optimal capital structure maximizes the firm's cost of debt. The optimal capital structure minimizes the firm's weighted average cost of capital. The optimal capital structure maximizes the firm's earnings per share (EPS). The optimal capital structure maximizes the firm's cost of equity. Understanding the impact of debt in the capital structure Suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the list and identify which items are correct. Check all that apply.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4QTD
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Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Transcribed Image Text:1. Capital structure decisions and firm value
Aa Aa
Why focus on the optimal capital structure?
A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock,
and common equity capital) and is often presented as a percentage of the type of financing used.
As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or
shareholder value. This is called the optimal capital structure.
Which of the following statements regarding a firm's optimal capital structure is true?
The optimal capital structure maximizes the firm's cost of debt.
The optimal capital structure minimizes the firm's weighted average cost of capital.
The optimal capital structure maximizes the firm's earnings per share (EPS).
The optimal capital structure maximizes the firm's cost of equity.
Understanding the impact of debt in the capital structure
Suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues
related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have
made some mistakes.
Review the list and identify which items are correct. Check all that apply.
Transcribed Image Text:Review the list and identify which items are correct. Check all that apply.
Workshop Talking Points
An increase in debt financing increases the taxes that a
company owes.
In an event of liquidation, creditors will get their claims
over a firm's assets before common shareholders.
A decrease in debt financing increases the risk of
bankruptcy, and managers are encouraged to invest in
high-risk projects.
An increase in debt financing beyond a certain point
increases the risk of bankruptcy and financial distress.
Interest paid on debt is deducted from a firm's pretax
income, thus reducing the amount of taxes that it owes.
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