Operating leverage is the use of fixed operating

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Unformatted text preview: use of fixed operating Describe the types of capital, external assessment of capital structure, the capital structure of non-U.S. firms, and capital structure theory. Two LG1 LG2 LG3 CHAPTER 11 basic types of capital—debt capital and equity capital—make up a firm’s capital structure. They differ with respect to voice in management, claims on income and assets, maturity, and tax treatment. Capital structure can be externally assessed by using financial ratios—debt ratio, times interest earned ratio, and fixed-payment coverage ratio. Non-U.S. companies tend to have much higher degrees of indebtedness than do their U.S. counterparts, primarily because U.S. capital markets are much more developed. Similarities between U.S. corporations and those of other countries include industry patterns of capital structure, large multinational company capital structures, and the trend toward greater reliance on securities issuance and less reliance on banks for financing. Research suggests that there is an optimal capital structure that balances the firm’s benefits and costs of debt financing. The major benefit...
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This document was uploaded on 03/30/2014.

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