The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC). Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.
Which capital structure maximizes earnings per share?
a. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share. b. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio. c. Increasing a company's debt ratio will
Which capital structure maximizes the firm's tie ratio?
b. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio. c. Increasing a company's debt ratio will
Which capital structure minimizes a firm's weighted average cost of capital?
The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price. Which of the following statements is CORRECT? The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
What is the optimal capital structure for a company?
The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's stock price. Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant? a. An increase in the corporate tax rate.
What is the capital structure that maximizes firm value?
What Is Optimal Capital Structure? The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company's market value while minimizing its cost of capital.
What is horizontal capital structure?
Horizontal Capital Structure: In a Horizontal Capital Structure, the firm has zero debt components in the capital structure mix. The structure is quite stable. Expansion of the firm takes in a lateral manner, i.e. through equity or retained earnings only. The absence of debt results in the lack of financial leverage.
What is target capital structure?
Target capital structure is the capital structure that is the most advantageous way for funding a company. There may be a number of optimum capital structures of a company, but the target capital structure is the only one that is considered to be ideal. Capital structure decisions are usually taken in two levels.
Which statement is correct about capital structure?
The correct answer to the question is: Having too little debt may increase the risk of default in repayment. Explanation: Capital structure: It refers to the unique mixture of debt and equity used to finance a company's assets and operations.
What is a vertical capital structure?
Vertical Capital Structures: The base of the structure is a little amount of equity share capital which serves as the foundation for a super structure of preference share capital and debt. Pyramid Shaped Capital Structure: Large proportion consisting of equity capital and retained earnings.
What are types of capital structure?
The meaning of Capital structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt. The different types of funds that are raised by a firm include preference shares, equity shares, retained earnings, long-term loans etc.
What is minimized when the value of a firm is maximized?
Further, the value of the firm will be maximized when the firm's weighted-average cost of capital (WACC) is minimized.
What is capital structure of a company?
Capital structure refers to the specific mix of debt and equity used to finance a company's assets and operations. From a corporate perspective, equity represents a more expensive, permanent source of capital with greater financial flexibility.
What is capital structure example?
1 This mix of debts and equities make up the finances used for a business's operations and growth. For example, the capital structure of a company might be 40% long-term debt (bonds), 10% preferred stock, and 50% common stock. The capital structure of a business firm is essentially the right side of its balance sheet.
What is capital structure planning?
Planning a capital structure is a highly psychological, complex and qualitative process. It involves balancing the shareholders' expectations (risk & returns) and capital requirements of the firm.
Why is capital structure important?
Capital structure relates to how much money—or capital—is supporting a business, financing its assets, and funding its operations. It can also show company acquisitions and capital expenditures that can influence the business's bottom line.
What are the elements of capital structure?
Capital structure is the mix of debt and equity that a business uses to fund its operations. A firm's capital structure may contain many components, including common stock, multiple classes of preferred stock, bonds, debt having different terms and maturity dates, and retained earnings.
What is EBIT and EPS analysis in financial management?
Concept of EBIT-EPS Analysis: Simply put, EBIT- EPS analysis examines the effect of financial leverage on the EPS with varying levels of EBIT or under alternative financial plans. It examines the effect of financial leverage on the behavior of EPS under different financing alternatives and with varying levels of EBIT.
What is a simple capital structure?
A simple capital structure is a capital structure that contains no potentially dilutive securities. Such companies are only required to report basic earnings per share (EPS). Examples of potentially dilutive securities include convertible preferred stock, convertible debt, stock options, and warrants.
What do you mean by break even EBIT?
Financial breakeven point is a point where earnings before income tax (EBIT) is equal to financial cost of a firm (or) earnings per share (EPS) is equal to zero. It is useful in calculating zero net income. It also helps in at which earnings per share is zero. Formula.
What is levered firm?
levered firm (plural levered firms) (UK, business, finance) A company that funds its operations by taking out loans.
Do debt to total assets ratios vary?
e. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
Does leverage affect cost of equity?
Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity. e. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. Click card to see definition 👆.
Does raising debt ratios reduce WACC?
Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC. b. Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
What factors affect a firm's business risk?
b. The factors that affect a firm's business risk include industry characteristics and economic conditions , both of which are generally beyond the firm's control.
Does leverage affect equity?
Since a firm's beta coefficient is not affected by its use of financial leverage, leverage does not affect the cost of equity. d. Increasing a company's debt ratio will typically increase the marginal costs of both debt and equity financing. However, this action still may lower the company's WACC.