Other Capital Structure Issues - Business Finance - ثاني ثانوي

8.4 Other Capital Structure Issues The determination of a company's cost of funds and optimal capital structure influences nearly every aspect of business and financial decisions. In addition to the previous discussion, these factors should be considered: 1. To determine the cost of capital, the financial manager must know all the component costs (debt, preferred stock, and common stock). The estimate for the cost of equity requires information not easily observable, such as the future dividend growth rate, the beta coefficient of the company, as well as other items. Inaccurate estimates will produce an inappropriate measure of the cost of equity. 2. Financial managers need to know how the market will value the shares after the financing decision is made. While this is very difficult to know, a financial manager makes the decision in an expectation of the market treating the shares in a particular way. For example, an extensive use of debt financing can result in unexpected lower stock prices. 3. An optimal capital structure is expected to maximize the value of a firm's stock. That may be valid for publicly held companies, but most businesses are not publicly traded. Even though most privately held firms are small, the determining cost of capital is still important for planning new investments in equipment and other capital projects. The financial managers of small, private firms will usually not know the current value of their firm's equity. Exercises Choose the correct answer. 1. Knowing how changes in financing will affect stock prices is usually very uncertain True/False 2. A maximized stock value usually occurs when: a. increased debt financing is used. b. decreased debt financing is used. c. the optimal capital structure is achieved. d. tax rates are increasing. وزارة التعليم 2924-1749 Link to digital lesson www.den.edu.sa CHAPTER Cost of Capital 339