Unformatted text preview: ucts or services. In a practical sense, a firm can probably more readily increase its value
by improving quality and reducing costs than by fine-tuning its capital structure. 522 PART 4 Long-Term Financial Decisions Balance Sheet
capital Stockholders’ equity
Common stock equity
Retained earnings Equity
capital The various types and characteristics of corporate bonds, a major source of
debt capital, were discussed in detail in Chapter 6. The cost of debt is lower than
the cost of other forms of financing. Lenders demand relatively lower returns
because they take the least risk of any long-term contributors of capital: (1) They
have a higher priority of claim against any earnings or assets available for payment. (2) They can exert far greater legal pressure against the company to make
payment than can holders of preferred or common stock. (3) The tax deductibility of interest payments lowers the debt cost to the firm substantially.
Unlike debt capital, which must be repaid at some future date...
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