3. Capital structure decisions and firm value Aa Aa E Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock, and common equity capital) and is often presented as a percentage of the type of financing used. As with all financial decisions, a firm should try to establish a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure; it is also the debt-equity mix that: O Minimizes the firm's weighted cost of capital O Maximizes the firm's dividends O Maximizes the firm's weighted cost of capital O Maximizes the company's net income Suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the list and identify which items are correct. Check all that apply. Workshop Talking Points An increase in debt financing beyond a certain point is likely to increase a firm's cost of equity. The pretax cost of debt increases as a firm's risk of bankruptcy increases. Risks of bankruptcy increase management's spending on perquisites and increase agency costs. There is a hierarchy of creditors in the event of bankruptcy, and bondholders have a claim that is senior to the claims of a firm's preferred and common shareholders. An increase in debt financing decreases the risk of bankruptcy