Question

A firm’s capital structure and its overall cost of capital are affected by firm-specific factors as well as market, regulatory, and macro-economic conditions. You are asked to discuss the individual impact of three different scenarios (assuming everything else remains constant) on a firm’s capital structure and its overall cost of capital. Please be specific and provide the theoretical rationale in support of your responses. You can use the space provided in the matrix below or use a separate sheet to answer the questions. (This is the question in its entirety, no further info is provided)

Expected changes in the firm, capital markets, and regulation

1. Tax deductibility of interest payments on debt may be stopped by the U.S. Congress.
2. New international acquisitions are expected to reduce the firm’s exposure to currency risk.
3. Securities and Exchange Commission (SEC) is expected to question the firm for possible misrepresentation of its annual reports.

Answer 1

A firm's capital structure and its overall cost of capital are affected by many factors such as its nature of the business, market condition, regulatory and macro-economic condition.

The nature of business is an important factor in deciding a firm's capital structure , because of risk vary form different to different businesses.

Regulatory means controlling body which regulates firm, so the capital structure is according to the regulatory body.

last but not least macro-economic condition, firm decide their capital structure according to macro economic means economy of whole country . in other word which is cheaper equity or debt and risk