In his private office, just down the hall from his conference room, the' Chicf Financial Officer (CFO) of Theiss Telecommunications is meeting with his newly hired assistant, Rafael. Cro: 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. Theiss Telecom can potentially have three different capital structures; its actual capital structure, a target capital structure, and an optimal capital structure. If we wanted to talk about the long-run capital structure at which Theiss Telecom uitimately wants to operate, weid be taking about which capital structure, Rafael? RAFALt. We'd be talking about Therss Telocom's capital structure. This is the capital structure tht Theiss Telecom wants to operate, and it can differ from its rdeal capital structure. CFO: Very oood. Now, if Theiss Telecom's current capital structure consists of 44.5% debt and 55.596 cornmon equity, then, Rafael, how would we know if we are operating with our optimal capial structine? R.A R.Lz An optaral capatal structure is characterized ty two important attibutest first, it the firm's weighted average cost of capital, and second, it the value of the firm, which should nake our shareholders very happy. RAFAEL: An optimal capital structure is characterized by two important attributes: First, it the firm's weighted average cost of capital, and second, it the value of the firm, which should make our shareholders very happy. CFO: Again, that's greatl Now, tell me, in general and without talking about Theiss Telecom 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? RAM ALt 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 ambunts if its busmess activities or its industry becomes more risky or competitive. In peneral, these circumistances will decrease a firm's relance on debt financing. Second, the avallability of - may prompta company to borrow more or issue new shares and thereby deviate from its target capital structure. Lastly, the advantage of using a less. than -optimal level of debt is that it the firm's rescrve borrowing capacity. CrO: Rafael, you've passed my first test with flying colors! Wath this tinderstanding of the theory and some real world experience, you? be carnang your bonus in no time. In his private office, just down the hall from his conference room, the' Chicf Financial Officer (CFO) of Theiss Telecommunications is meeting with his newly hired assistant, Rafael. Cro: 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. Theiss Telecom can potentially have three different capital structures; its actual capital structure, a target capital structure, and an optimal capital structure. If we wanted to talk about the long-run capital structure at which Theiss Telecom uitimately wants to operate, weid be taking about which capital structure, Rafael? RAFALt. We'd be talking about Therss Telocom's capital structure. This is the capital structure tht Theiss Telecom wants to operate, and it can differ from its rdeal capital structure. CFO: Very oood. Now, if Theiss Telecom's current capital structure consists of 44.5% debt and 55.596 cornmon equity, then, Rafael, how would we know if we are operating with our optimal capial structine? R.A R.Lz An optaral capatal structure is characterized ty two important attibutest first, it the firm's weighted average cost of capital, and second, it the value of the firm, which should nake our shareholders very happy. RAFAEL: An optimal capital structure is characterized by two important attributes: First, it the firm's weighted average cost of capital, and second, it the value of the firm, which should make our shareholders very happy. CFO: Again, that's greatl Now, tell me, in general and without talking about Theiss Telecom 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? RAM ALt 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 ambunts if its busmess activities or its industry becomes more risky or competitive. In peneral, these circumistances will decrease a firm's relance on debt financing. Second, the avallability of - may prompta company to borrow more or issue new shares and thereby deviate from its target capital structure. Lastly, the advantage of using a less. than -optimal level of debt is that it the firm's rescrve borrowing capacity. CrO: Rafael, you've passed my first test with flying colors! Wath this tinderstanding of the theory and some real world experience, you? be carnang your bonus in no time
