Chapter13Capital Structure of the Firm

CAPITAL STRUCTURE

An important job of the board of directors and the CEO is to establish the mix of funds that will be used to finance a firm’s assets. Capital structure is defined as the combination of debt and equity that provides the financing for assets. Two expressions of capital structure are:

Balance sheet. Accounting develops the book value of assets and matches it against total liabilities. The difference between assets and debt is equity, the accounting value of ownership. The breakout between debt and equity shows the capital structure for accounting purposes.

Market values. Separately, capital structure can start with debt and equity. How much does a firm owe? What is the market value of ...

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