Topic Report â€“ Capital Structure
Provide your discussion for the following questions. For clarification, at least a couple of paragraphs of writing is required for each question.
1. Explain the financial risk in terms of firm capital structure. What is the relationship between financial risk and required return of equity?
2. In each of the theories of capital structure, the cost of equity increases as the amount of debt increases. So why don’t financial managers use as little debt as possible to keep the cost of equity down? After all, aren’t financial managers supposed to maximize the value of a firm?
3. Explain when the optimal capital structure is achieved according to the Trade-Off theory.
4. In view of the Pecking Order theory, why equity ranks at the bottom in capital financing?
5. List at least three determinants of capital structure in empirical literature.