The Complete CFO Handbook

Chapter 2. Capital Structure Decisions

Agenda

Item 1	Summarize what is meant by the capital structure of a firm.
Item 2	Identify the factors that affect the capital structure of a firm.
Item 3	Evaluate the different measures of the extent of debt usage in a firm's capital structure: debt ratio, debt‐to‐total assets, debt‐equity ratio, and debt‐to‐capital ratio.
Item 4	Describe what is meant by operating and financial leverage.
Item 5	Explain the advantages and disadvantages of leverage.
Item 6	Describe the governance value of debt financing.
Item 7	Analyze the impact of taxes on the capital structure decision.
Item 8	Explain what is meant by financial distress and the effect of the costs of financial distress on the capital structure decision.
Item 9	Interpret the role of the cost of capital in the capital structure decision and describe the process and issues related to estimating this cost.
Item 10	Interpret what is meant by an optimal capital structure.
Item 11	Describe the agency relationship and the problems associated with the agency relationship.

Abusiness invests in new plant and equipment to generate additional revenues and income—the basis for its growth. One way to pay for investments is to generate capital from the company's operations. Earnings generated by the company belong to the owners and can either be paid to them—in the form of cash dividends—or plowed back into the company.

The owners' investment in the company is referred to as owners' equity or, simply, equity. If earnings are plowed ...