Question

Which one of the following would be considered a capital structure decision?

1) Determining the optimal mix of debt and equity financing
2) Deciding on the dividend payout ratio
3) Selecting the appropriate investment projects
4) Managing the company's working capital

Answer 1

A capital structure decision involves determining the optimal mix of debt and equity financing, which is a crucial choice impacting a firm's risk, value, cost of capital, and financial flexibility.

Step-by-step explanation:

The decision among the presented options that would be considered a capital structure decision is determining the optimal mix of debt and equity financing. This involves analyzing and making choices about the proportion of a firm's financing through debt (borrowing through banks or bonds) versus equity (selling stock). This key decision has significant implications for the overall risk and value of the firm.

Choosing an optimal capital structure is essential for a company's financial sustainability and growth. It impacts the cost of capital, control of the company, and financial flexibility. Firms need to weigh the advantages and disadvantages, such as the obligation to make interest payments when borrowing or relinquishing some control when issuing stock, to decide on the best mix.