Which of the following statements regarding capital structure is(are) correct? Choose all correct answer(s). Airlines have very high leverage because they have very stable cash flows and low probability of financial distress Assume that United States adopted a dividend imputation system, the tax benefit of debt financing would decrease on average. Other things equal (i.e. identical leverage and identical asset value), an iron ore company's financial distress O cost is likely to be higher than a gold mining company because iron ore company's beta is likely to be higher than that of the gold mining company. Companies' actual leverage ratios often deviate from their optimal ratios but over the long-run they tend to adjust the leverage ratios toward their optimal levels.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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