Question

In terms of corporate finance, please explain the importance of capital structure and give examples.

Answer 1

A capital structure is defined as combination of sourcxe of fund (Debt equity and preferred stock). Optimal capital structure is combination of debt and equity at which stock price of company is highest. This because stock price depends on the WACC of the company. If WACC of company is highest then Stock price is lowest and if WACC is lowest then stock price is highest.

A capital structure decision is important for any firm because it directly relate to cost of capital of the firm. companies wants to lower its cost of capital so that company can invest fund in more projects and earn positive earnings.