CFO: 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. Teuton can potentially have three different capital structures: its actual capital structure, a target capital structure, and an optirnal capital structure. If we wanted to talk about the observed capital structure at which Teuton actually exhibits today or any other specific point in time, wed be talking about which capital structure, Sarah? SARAH: We'd be talking about Teuton's differ from its ideal capital structure. capital structure. This is the capital structure that Teuton is currently exhibiting, and it can CFO: Very good. Now, if Teuton's current capital structure consists of 34.5% debt and 65.5% common equity, then, Sarah, how would we know if We are operating with our optimal capital structure? SARNH: An optimal capital structure is characterized by two important attributes: First, it minemizes the firm's , and second, it maximizes which should make our shareholders very happy. SARNH: An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's , and second, it maximizes , which should make our shareholders very happy. CFO: Again, that's greatl Now, tell me, in general and without talking about Teuton in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure? SARAH: Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant. Second, the availability of may prompt a company to borrow or issue new shares and thereby deviate from its target capital structure. CrO: Sarah, you've passed my first test with flying colorsl With this understanding of the theory and some real-world experience, you'l be eaming your bonus in no time