Many factors influence capital structure decisions; and as we will see, determining the optimal capital structure is not an exact science. Therefore, even firms in the same industry often have dramatically different capital structures. Define the optimal capital structure and differentiate it from the target capital structure. Name four factors that influence a firm's target capital

Many factors influence capital structure decisions; and as we will see, determining the optimal capital structure is not an exact science. Therefore, even firms in the same industry often have dramatically different capital structures. Define the optimal capital structure and differentiate it from the target capital structure. Name four factors that influence a firm's target capital

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. Leverage involves using fixed costs to magnify the potential return to a firm. Explain the hedging (maturity matching) approach to financing 2. Illustrate the relationship between profitability, liquidity, and risk in the management of working capital.
The optimal capital structure for firms in stable industries can reasonably contain ________________ than firms in volatile industries. Select one: A. more debt B. less debt C. an equal amount of debt D. There is no relationship between the cyclical nature of an industry and optimal capital structure
In understanding capital structure, one approach, which I adopt, is to demonstrate, under certain assumptions, that financing decisions are irrelevant – in that they have no impact on firm value. Then, we show how relaxing these assumptions impacts optimal financing choices. Group of answer choices True False
Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.
The cost of capital is affected by different factors. The firm has control over some of the factors, while there are other factors that the firm is unable to influence. Select the factor that the company has control over: Select one: a. Level of Interest Rates b. Dividend Policy c. Tax Rates d. Stock Prices
Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?
3. Explain the relationship between the weighted average cost of capital (WACC), the maximization of firm value, and financial decision making.
Modigliani-Miller theorem provides a basis for modern thinking on capital structure. Explain the two fundamental assumptions used to support the M&M capital structure theorem.

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