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Capital structure: fallacies and misconceptions

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What type of capital structure should a firm choose and why? Please include capital structure fallacies and their effects on a firm's decision.

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Simply put, a firm should choose a capital structure based on the least cost alternative. The capital structure includes:

* Debt --- either bonds or loans
* Equity --- preferred stock and common stock.

Debt carries with it the need to pay ongoing interest, which will represent a cost for the firm in interest payments for the maturity life of the debt.

Preferred stock usually has a provision for paying dividends. While not a ...

Solution Summary

Firms attract capital for investment purposes via debt and/or equity. The need is to understand the cost of these funding sources and determine which is the most beneficial for the firm. This discussion provides information to make those decisions.

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