Question

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? O The optimal capital structure minimizes the firm's weighted average cost of capital O The optimal capital structure maximizes the firm's earnings per share (EPS) O The optimal capital structure maximizes the firm's cost of debt. 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 Workshop Talking Points Risks of bankruptcy increase management spending on perquisites and increase agency costs The pretax cost of debt increases as a firm's risk of bankruptcy increases An increase in the risk of bankruptcy is likely to reducea firm's free cash flows in the future An increase in debt financing decreases the risk of bankruptcy □ An increase in debt financing beyond a certain point is likely to increase the firm's cost of equity

Answer 1

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