Corporate Finance

Capital structure

1

Capital structure refers to the amount of debt that a company has in comparison to its levels of equity. Striking the right balance between the two types of financing is crucial for the financial health of the firm.

2

According to trade-off theory, the management of the firm should only raise capital if the benefits outweigh the drawbacks. So, if a firm can achieve growth by altering the capital structure, it is worthwhile.

3

Debt is preferable as it is tax-deductible, though too much debt can cause financial problems as interest payments are not optional. Equity finance is seen as the worst option as a firm loses some ownership.

4

ensuring that a company has a suitable capital structure is key as it can threaten their future if not. Capital structure varies, so investors should make comparisons between companies in the same industry.

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