A firm’s capital structure refers to the firm’s: a. Provide letter designation o

Question

A firm’s capital structure refers to the firm’s:

a.  Provide letter designation of your preferred answer

A.            mixture of various types of production equipment.

B.            investment selections for its excess cash reserves.

C.            combination of cash and cash equivalents.

D.            combination of accounts appearing on the left side of its balance sheet.

E.            proportions of financing from current and long-term debt and equity.   

b.  Explain how a firm’s capital structure relates to the firm’s beta

Explanation / Answer

a) E is correct.

A firm's capital structure refers to the firm's proportions of financing from current and long-term debt and equity.

b) Firm's beta represents the market risk associated with the firm's asset. Higher the beta means higher the risk and higher the cost of capital. Typically, firm's with low level of debt has lower beta in comparion to firms with higher level of debt.

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