Before our next meeting with the bankers, let's take a second and make sure that we have a common understanding about the company's capital structure. We get to choose the form of money used to finance Theriot Tech's activities. We can use borrowed (debt) money or retained earnings, we can sell new shares of common stock, or we can sell new preferred shares. So, my question to you, Savannah, is how do we know what sources of financing have been used in the past, and how much of each should we use in the future? The ____ section of the company's balance sheet reports the forms of financing that have been used in the past. These forms of financing represent ongoing financial commitments of the firm. Since Theriot Tech's current capital structure consists of 37.5% debt and 62.5% common equity, then we know that our current _____, or the proportion of debt in the capital structure, is 37.5%. And? We know that Theriot Tech can exhibit three possible capital structures: its current, actual capital structure, a target capital structure, and an optimal capital structure. The ____ capital structure is the long-run structure at which Theriot Tech ultimately wants to operate, while an ____ capital structure will maximize the value of Theriot Tech's common stock and make our shareholders very happy. Good, Savannah! Now, is there a relationship between a firm's optimal capital structure and its weighted average cost of capital? Yes, there is a relationship; not only will an optimal capital structure maximize the value of a corporation, it will also ______ the company's weighted average cost of capital. However, the exact value of the ______ that corresponds to an organization's optimal capital structure depends on its industry and the characteristics of the firm. Excellent overview, Savannah! You've passed my first test with flying colors! With this understanding of the theory and some real-world experience, you'll be earning your bonus in no time