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When deciding on capital structure, managers must evaluate numerous elements, including the mix of debt and equity used to fund the company's operations and growth. Some of these issues include the cost of capital, the risks involved, financial flexibility, market conditions, tax considerations, and investor expectations. One important factor is to look at the firm's need for capital (Essaides, 2015). This considers operations, natural growth, acquisitions, and the return for shareholders (Essaides, 2015). Next would be to look at the minimum amount of liquidity needed to finance the project and run the liquidity through "shock tests" to see how it would affect the firm if there were a sudden drop in revenue (Essaides, 2015). It is essential to look at the overall business and financial risk, if there is additional cash accessible if needed, and how it will maximize the firm's overall value.

Firms may have different capital structures since firms with a high leverage ratio and an aggressive capital structure utilize more debt than equity to finance assets (Tuovila, 2023). A corporation with a low leverage ratio and a conservative capital structure pays for assets with more equity than debt (Tuovila, 2023). A high leverage ratio and/or an aggressive capital structure, on the other hand, can contribute to higher growth rates, while a cautious capital structure can lead to lower growth rates (Tuovila, 2023). The purpose of firm management is to discover the appropriate debt-equity mix, often known as the optimal capital structure.

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In deciding on the capital structure managers must carefully evaluate various factors to ensure the ... View the full answer