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CAPITAL STRUCTURE 1 - CAPITAL STRUCTURE DECISIONS...

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CAPITAL STRUCTURE DECISIONS
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DEFINITIONS The proportions of debt and equity in the firm’s balance sheet. The debt-equity mix of the firm. The financing mix of the firm, or the mix of debt and equity financing. Does capital structure affect stock prices and the corporate cost of capital? Should different industries and firms within industries have different capital structures?
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Business and Financial Risks Business risk is the risk of firm’s assets if it uses no debt. It is a function of the uncertainty inherent in projections of a firm’s future rate of return on assets (ROA).
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Therefore, the business risk of a leverage- free firm can be measured by the standard deviation of its expected ROE. Business risk varies not only from industry to industry but also among firms in a given industry. Business risk depends on a number of factors:
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Demand variability Sales price variability Input cost variability Ability to adjust output prices for changes
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