Capital Structure in firms: fallacies and misconceptions
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Why do you think it is important for financial managers to focus on establishing the right capital structure for their firms?
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Solution Summary
This solution discusses why capital is worthy of managing and its related value to the firm. The firms fallacies and misconceptions are determined. The right to optimal capital structure is determined.
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Simply put, the right or "optimal " capital structure, by its very nature is the least costly form of available capital to the firm. Recognize that there are typically three classes of capital which each firm can use:
First, debt in the form of bonds is one level of capital structure. So what we are interested in is the least costly form of debt that can be arranged --- the one that allows us to pay the least amount of interest over the life of the loan.
Second, is preferred stock that has elements of debt and elements of equity associated with it? In this case, due to the nature of the offering, and because preferred stock grows in value ...
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