Which capital structure is better for a firm Actual capital structure of 9.5% or Target capital...

Which capital structure is better for a firm Actual capital structure of 9.5% or Target capital structure of 9.0%?

What is the difference between the two?

Expert Solution

Capital structure of a firm is the amount of debt in comparison to equity that it is using in financing its operations or expenditure plans. A high debt/equity ratio indicates firm have borrowed more funds through debt in comparison to equity. Higher debt means more obligation for the firm to payback interest as well as principal back to debtors. While in case of equity firm has lower risk as it does not have to payback interest or pricipal to shareholders.

Based on above comparison a firm which targets capital structure of 9% is better than firm having actual capital structure of 9.5%. A firm which targets capital structure of 9% either does the same by decreasing debt or by increasing equity thereby decreasing the risk of the company and its obligation to pay back to debtors.

jeff jeffy answered 2 years ago

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