Finance

Running head: FINANCE
Finance
Name of the Student
Name of the University
Authors Note
Course ID

1FINANCE
Table of Contents
Answer to question 4:.................................................................................................................2
Answer to A:..........................................................................................................................2
Answer to B:..........................................................................................................................2
Answer to C:..........................................................................................................................2
Answer to question 5..................................................................................................................3
Answer to A:..........................................................................................................................3
Answer to B:..........................................................................................................................3
Answer to C:..........................................................................................................................3
Answer to D:..........................................................................................................................4

2FINANCE
Answer to question 4:
Answer to A:
The capital structure is regarded as the amount of debt and equity that is employed by
the firm to fund the operations and finance the assets. The debt and equity is regarded as the
important element of capital structure because they are used to fund the operations of
business, capital expenses, acquisition and other investments. There are trade-off firms that
have to decide whether to increase the debt or equity and managers would balance both in
order to find the optimal capital structure. The capital structure is the mix of company’s debt
and equity they are important because it costs the company the amount of money to borrow.
Answer to B:
Attaining the right structure of capital particularly the composition of debt and equity
which is used by the company to finance its operations and strategic investment has vexed the
practitioners. An appropriate capital structure helps in providing tax benefit because interest
expenditure is tax deductible. A right capital structure helps in maintaining the low leverage
and supports the greater level of leverage with collateral. The appropriate capital structure
helps in mitigating the refinancing of risk by matching the debt and asset maturity.
Answer to C:
Leverage is measured by the company’s debt and equity. The degree of financial
leverage measures the sensitivity of the company’s earnings per share with respect to its
fluctuations in the operating income as the outcome of changes in the capital structure. The
financial leverage varies between companies because companies relies on mixture of equity
and debt to finance their operations and understanding the amount of debt that is held by the
company in evaluating whether it can pay its debts. If the company does not have any
appropriate level of taxable income to protect or if the company’s operating profit is lower