Capital structure and leverage
Capital structure and leverage

Summary/Abstract: Many factors influence capital structure decisions, and as we shall see, determining the optimal capital structure is not an exact science. This is why even firms in the same industry often have dramatically different capital structures. In this article, we examine the effect of debt on risk and on the optimal capital structure. You are able to identify the trade-offs that firms must consider when setting their target capital structure; distinguish between business risk and financial risk and explain the effect that debt financing has on a firm's expected return and risk; discuss the analytical framework used in determining the optimal capital structure; discuss capital structure theory and explain why firms in different industries tend to have different capital structures.

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