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Capital structure and cost of capital
What is capital structure in the context of a firm?
Capital structure refers to the mix of long-term sources of funds used by a firm, including equity, preference shares, debentures, and long-term debt, to finance its assets and operations.
What is the primary goal of capital structure decisions in a firm?
To maximize firm value and minimize overall cost of capital.
What is the optimum capital structure?
Optimum capital structure is the combination of debt and equity that minimises the overall cost of capital (WACC) and maximises the market value of the firm.
What does the term 'leverage' refer to in financial management?
Use of fixed cost sources to magnify returns to equity holders.
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