A CFO says that her firm chooses a capital structure that allows it to maintain a credit rating of AA. She reasons that a credit rating of AAA would be too conservative, but anything less than AA would be too risky. What capital structure model does this firm appear to follow? Capital Structure is a mix of debt and equity capital maintained by a firm. Capital structure is also referred as financial structure of a firm. The capital structure of a firm is very important since it related to the ability of the firm to meet the needs of its stakeholders. Managers appear to take credit ratings into account when making capital structure decisions. A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. The company’s capital structure leans more towards equity. It follows the pecking order model of capital structure. The model states that companies prioritize their sources of financing
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