Question: Explain why capital structure policy involves a trade-off between risk and return, and list the four primary factors that influence capital structure decisions. Distinguish between

  1. Explain why capital structure policy involves a trade-off between risk and return, and list the four primary factors that influence capital structure decisions.
  2. Distinguish between a firms business risk and its financial risk.
  3. Explain how operating leverage contributes to a firms business risk and conduct a breakeven analysis, complete with a breakeven chart.
  4. Define financial leverage and explain its effect on expected ROE, expected EPS, and the risk borne by stockholders.
  5. Explain what is meant by a firms optimal capital structure.

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