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Unformatted text preview: eas of financial decision making
because of its interrelationship with other financial decision variables.13 Poor
capital structure decisions can result in a high cost of capital, thereby lowering
the NPVs of projects and making more of them unacceptable. Effective capital
structure decisions can lower the cost of capital, resulting in higher NPVs and
more acceptable projects—and thereby increasing the value of the firm. This section links together many of the concepts presented in Chapters 4, 5, 6, 7, and 11
and the discussion of leverage in this chapter. Types of Capital
All of the items on the right-hand side of the firm’s balance sheet, excluding current liabilities, are sources of capital. The following simplified balance sheet illustrates the basic breakdown of total capital into its two components, debt capital
and equity capital. 13. Of course, although capital structure is financially important, it, like many business decisions, is generally not so
important as the firm’s prod...
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