solution

Capital Structure (Chapter 16)

1. What is meant by capital structure”?

2. What are two key features of leverage”?

3. What is meant by “financial leverage”

4. What are two major sources of financing for a corporation?

5. Compared to equity, what is the major advantage and disadvantage of financing with debt?

6 with financial leverage, what is fixed and what gets magnified?

7. What are two ways to determine if the use of debt will help or hurt shareholders?

8. How is a firm’s cost of capital computed: what does “WACC stand for?

9. What tends to happen initially to a firm’s WACC as more debt is used and why?

10. In the Static Theory of Capital Structure (pp. 514-517 in text) where in the debt-equity ratio is the optimal capital structure?

11. What does the simple PV framework imply about the value of a firm at the optimal capital structure?

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