Assignment 13-Capital Structure and Leverage Due Today at 11:59 PM EST 4. Capita
ID: 2804377 • Letter: A
Question
Assignment 13-Capital Structure and Leverage Due Today at 11:59 PM EST 4. 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? O The optimal capital structure maximizes the firm's cost of equity 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 minimizes the firm's weighted average cost of capital. 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 haveExplanation / Answer
1) The optimal capital structure minimizes the firm's weighted average cost of capital
cost of capital means the cost at which firm can borrow the capital, with optimal capital structure one can reduce this cost.
2) In event of liquidation, creditor will get their calim before shareholders - True
An increase in debr financing will increase taxes the company own - false since with increase in debt financing interters will increase and company gets tax shield which results in low taxes
An increase in debt financing over a certain point will bring risk of bankrupcy - true
An Decrease in debt financing over a certain point will increase risk of bankrupcy-false
Interest paid will be reduce from Income hence tax will be lower