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Unformatted text preview: b), at the optimal capital
structure, point M, the value of the firm is maximized at V*. CHAPTER 11 Leverage and Capital Structure 443 Generally, the lower the firm’s weighted average cost of capital, the greater
the difference between the return on a project and the WACC, and therefore the
greater the owners’ return. Simply stated, minimizing the weighted average cost
of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.
As a practical matter, there is no way to calculate the optimal capital structure implied by Figure 11.3. Because it is impossible either to know or to remain
at the precise optimal capital structure, firms generally try to operate in a range
that places them near what they believe to be the optimal capital structure. Review Questions
11–6 What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?
11–7 In what ways are the capital structures of U.S. and non-U.S....
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This document was uploaded on 03/30/2014.
- Spring '14