Question

Which of the following statements about capital structure are correct? Select ALL correct answers. A company...

Which of the following statements about capital structure are correct? Select ALL correct answers.

A company should always finance its business using as much debt as possible in order to optimize the capital structure.

Having too little debt may increase the risk of default in repayment.

A company needs to consider the current economic climate when making decisions on debt and equity proportions.

Having too much equity may dilute earnings and the value of the original investors.

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Answer #1

Statement A is FALSE because a company should always finance its business with optimum capital structure not debt structure.

Statement B is false because having too much debt will cause a risk for the company and increase the probability of default.

Statement C is true because a company should always consider the current environment in order to structure its overall capital that will help to gain an optimal capital mix.

option D is also correct because too much equity will dilute the earnings as well as it will also dilute the control of existing shareholders.

Correct statements are option(C )and option (D)

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