These concepts can be used to minimize the firms cost

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Unformatted text preview: tal. These concepts can be used to minimize the firm’s cost of capital and maximize its owners’ wealth. This chapter discusses leverage and capital-structure concepts and techniques and how the firm can use them to create the best capital structure. L LG1 LG2 leverage Results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners. capital structure The mix of long-term debt and equity maintained by the firm. Leverage Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners. Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk. The amount of leverage in the firm’s capital structure—the mix of long-term debt and equity maintained by the firm—can significantly affect its value by affecting return and risk. Unlike some causes of risk, management has almost complete control over the risk introduced through the use of leverage. Because of its effect on value, the financial manager must understand how to measure and evaluate leverage, particularly when making capital...
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