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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?


Definitions:

Net Income

The profit a company retains after all expenses and taxes have been removed from its revenue.

Inventory

A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold.

Perpetual Inventory Method

An inventory management system where updates are made continuously to record sales and purchases instantly, maintaining constant and accurate inventory records.

Consolidation Worksheet

A tool used in accounting to combine the financial statements of parent and subsidiary companies into a single document for analysis.

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