Reply with a short response to the following discussion posts: 

Post #1

Target capital structure-the ideal capital composition that every company desires. The combination of debt, common equity/stock, and preferred stock is actually included. The optimal cost of capital is the key goal of obtaining this target cost.

-In general, we've observed that capital-intensive industries, like the construction sector, heavily rely on debt in their cost structures to lower dividend payments, capital costs, and tax benefits. Another factor is that this industry operates with a bigger profit margin and therefore using debt will significantly lower tax payments on profits.

-The typical cost structure for the construction sector is

40% debt, 50% equity, and 10% preferred stock.

-Since these businesses operate with smaller profit margins and require less capital, such as the dairy and service sectors, they often employ less debt in their capital mix and instead rely largely on common stock to distribute profits to its shareholders in the form of dividends.

-Typically, their capital structures consist of

70% common equity, 20% preferred stock, and 10% debt.

Post #2

The target capital structure of a company refers to the capital which the company is striving to obtain. In other words, it's the mix of debt, preferred stock and common equity which is expected to optimize the stock price of a company. Target capital structure is most advantageous way for funding a company. It's difficult to form because "it needs accurate estimations and calculations of various complex issues pertaining to it. However, it is one of the most important decisions that must be taken by business firms because it creates room for the overall business environment of a company" (Banerjee, 2021). Firms in different industries will use capital structures better suited to their type of business.

For example, the capital structure of an auto manufacturing company might be 40% debt, 10% preferred stock, and 50% common stock, while a dairy production company might be 10% debt, 20% preferred stock and 70% common equity.

Some industries are more capital intensive, which results in them having a higher profit margin. Lower capital intensive industries rely heavily on common stock and distribute the profit as dividend.