In his private office, just down the hall from his conference room, the Chief Financial Officer (CFO) of Theiss Telecommunications is meeting with his newly hired assistant, Ainsley.

CFO: Before our next meeting with the bankers, lets take a second and make sure that we have a common understanding about the companys capital structure. We get to choose the form of money used to finance Theiss Telecoms 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, Ainsley, 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?

AINSLEY: The [right-hand or bottom OR left-hand or top) section of the companys 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 Theiss Telecoms current capital structure consists of 37.5% debt and 62.5% common equity, then we know that our current [equity capacity OR debt capacity], or the proportion of debt in the capital structure, is 37.5%.

CFO: And?

AINSLEY: We know that Theiss Telecom can exhibit three possible capital structures: its current, actual capital structure, a target capital structure, and an optimal capital structure. The [optimal OR target] capital structure is the long-run structure at which Theiss Telecom ultimately wants to operate, while an [actual OR optimal] capital structure will maximize the value of Theiss Telecoms common stock and make our shareholders very happy.

CFO: Good, Ainsley! Now, is there a relationship between a firms optimal capital structure and its weighted average cost of capital or WACC?

AINSLEY: Yes, there is a relationship; not only will an optimal capital structure maximize the value of a corporation, it will also [maximize OR minimize] the companys WACC. However, the exact value of the [debt-to-equity ratio OR equity-to-debt ratio] that corresponds to an organizations optimal capital structure depends on its industry and the characteristics of the firm.

CFO: Excellent overview, Ainsley! Youve passed my first test with flying colors! With this understanding of the theory and some real-world experience, youll be earning your bonus in no time.