1. Capital structure decisions and firm value A Aa E Why focus on the optimal capital structure? Capital structure decisions involve the ways a firm's assets are financed and are often presented as a percentage of the type of financing used, such as debt, preferred stock, and common equity. As with all financial decisions, a firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure; it is also the debt-equity mix that: Maximizes the net income Maximizes the weighted average cost of capital (WACC) Maximizes the dividends Minimizes the weighted average cost of capital (WACC) O Understanding the impact of debt in the capital structure Suppose you are conducting a worishop on capital structure decisions and you want to highlight certain key issues related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the list and identify which items are correct. Check all that apply. Workshop Talking Points A decrease in debt financing increases the risk of bankruptcy, and managers are encouraged to invest in high-risk projects An increase in debt financing increases the taxes that a company owes. Review the list and identify which items are correct. Check all that apply. Workshop Talking Points 0 A decrease in debt financing increases the risk of bankruptcy, and managers are encouraged to invest in high-risk projects. 0 An increase in debt financing increases the taxes that a company owes. 0 An increase in debt financing beyond a certain point increases the risk of bankruptcy and financial distress. 0 Interest paid on debt is deducted from the firm's pretax income, thus reducing the amount of taxes that it owes. 0 If the company is liquidated, creditors will be paid before any payment is made to the common shareholders