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4. Capital Structure Overview and Theory Introducing Capital Structure Capital Structure > Introducing Capital Structure Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_104&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. In theory, capital structure does not alter the value of a firm, so there is an incentive to use more debt and deduct interest expense to achieve tax savings. In reality, there is financial risk in taking on too much debt, so each company must find a balanced structure. Trade-Off Theory and Pecking Order Theory are two different explanations for differences among observed capital structures. Capital Structure Overview and Theory Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-structure-13/introducing-capital-structure-104/capital-structure- overview-and-theory-446- 3785?campaign_content=book_192_section_104&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Capital Structure. View on Boundless.com Capital Structure > Introducing Capital Structure

6. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

7. Key terms equity Ownership, especially in terms of net monetary value, of a business. structure A cohesive whole built up of distinct parts. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure

8. Capital Structure. Capital Structure shows how a company's assets are built out of debt and equity. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "File:(-)-Menthone structure.svg - Wikimedia Commons." Public domain http://commons.wikimedia.org/w/index.php?title=File:(-)- Menthone_structure.svg&page=1 View on Boundless.comPublic domainhttp://commons.wikimedia.org/w/index.php?title=File:(-)- Menthone_structure.svg&page=1View on Boundless.com Capital Structure

9. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure In a perfect market, which of the following statements is true? A) Investment decisions are not affected by financing decisions. B) All of these answers. C) The value of a company is independent of its capital structure. D) As a company increases its leverage, total risk is conserved and no extra value is created.

10. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure In a perfect market, which of the following statements is true? A) Investment decisions are not affected by financing decisions. B) All of these answers. C) The value of a company is independent of its capital structure. D) As a company increases its leverage, total risk is conserved and no extra value is created.

11. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure Under the Pecking Order Theory, what is the order of funding sources to finance a project from the most preferred method to least desirable? A) Use capital reserves; sell equity; issue debt. B) Issue debt; use capital reserves; sell equity. C) Issue debt; sell equity; use capital reserves. D) Use capital reserves; issue debt; sell equity.

12. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure Under the Pecking Order Theory, what is the order of funding sources to finance a project from the most preferred method to least desirable? A) Use capital reserves; sell equity; issue debt. B) Issue debt; use capital reserves; sell equity. C) Issue debt; sell equity; use capital reserves. D) Use capital reserves; issue debt; sell equity.

13. Attribution Wikipedia. "Capital structure." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_structureCC BY-SA 3.0http://en.wikipedia.org/wiki/Capital_structure Wiktionary. "equity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/equityCC BY-SA 3.0http://en.wiktionary.org/wiki/equity Wiktionary. "structure." CC BY-SA 3.0 http://en.wiktionary.org/wiki/structureCC BY-SA 3.0http://en.wiktionary.org/wiki/structure Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure