BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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debt-equity mix
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debt-capital mix
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equity expenses mix
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debt-interest mix
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Detailed explanation-1: -The traditional approach to capital structure advocates that there is a right combination of equity and debt in the capital structure, at which the market value of a firm is maximum.
Detailed explanation-2: -The traditional theory of capital structure states that when the weighted average cost of capital (WACC) is minimized, and the market value of assets is maximized, an optimal structure of capital exists. This is achieved by utilizing a mix of both equity and debt capital.
Detailed explanation-3: -The theory of the traditional structure of valuing a firm suggests that there is an optimal debttoequity ratio that has a minimum overall cost of capital and maximum market value of a firm. On the sides of this point, changes in the financing mix can bring positive changes to the value of a firm.
Detailed explanation-4: -A firm can affect its cost of capital through its capital structure, dividend policy and investment policy.
Detailed explanation-5: -Under the core preposition of NOI approach, the overall cost of capital depends on the business risk of the firm, and business risk does not change with change in debt equity mix, hence overall cost of capital remains constant.