In Each of the Theories of Capital Structure the Cost

question 59

Essay

In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down?
After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?

Interpret profitability ratios and their relevance to stakeholders.

Understand the tools and techniques of financial analysis, including ratio, horizontal, and vertical analysis.

Understand the concepts of profitability, solvency, and liquidity in financial context.

Identify and apply different standards for financial statement analysis including intra-company, competitor, and industry standards.

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Definitions:

Noncash Accounts

Accounts that represent transactions not involving physical cash, such as depreciation, amortization, or accruals.

Direct Method

A cash flow statement preparation approach that lists major operating cash receipts and payments, providing a clearer view of cash flow sources and uses.

Total Assets Ratio

A financial ratio comparing the total assets of a company to another financial metric, often used to assess a company's leverage or investment efficiency.

Long-Term Assets

Assets expected to provide economic benefits over a period longer than one year, such as buildings, machinery, and land.